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...
CA - Independent contractor withholding webinar announced The California Franchise Tax Board (FTB) is holding a free webinar
on December 20, 2011, at 10 a.m. PST, for those who must withhold
personal income tax on California source income...
HI - 2011 electronic filing handbook released The Hawaii Department of Taxation has released its Handbook for
Electronic Filers of Hawaii Individual Income Tax Returns for tax
year 2011. The handbook is designed as a companion...
OR - No good cause for representative’s failure to appear Regarding a taxpayer’s Oregon personal income tax appeal,
good cause did not exist for the failure by her representative to
either attend a case management conference or expl...
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.
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.
When an individual dies, certain family members may be eligible for Social Security benefits. In certain cases, the recipient of Social Security survivor benefits may incur a tax liability.
When an individual dies, certain family members may be eligible for Social Security benefits. In certain cases, the recipient of Social Security survivor benefits may incur a tax liability.
Family members
Family members who can collect benefits include children if they are unmarried and are younger than 18 years old; or between 18 and 19 years old, but in an elementary or secondary school as full-time students; or age 18 or older and severely disabled (the disability must have started before age 22). If the individual has enough credits, Social Security pays a one-time death benefit of $255 to the decedent’s spouse or minor children if they meet certain requirements.
Benefit amount
The benefit amount is based on the earnings of the decedent. The more the decedent paid into Social Security, the larger the benefit amount. Social Security uses the decedent’s basic benefit amount and calculates what percentage survivors may receive. That percentage depends on the age of the survivors and their relationship to the decedent. Children, for example, receive 75 percent of the decedent’s benefit amount.
Taxation
The person who has the legal right to receive Social Security benefits must determine whether the benefits are taxable. For example, if a taxpayer receives checks that include benefits paid to the taxpayer and the taxpayer's child, the child's benefits are not considered in determining whether the taxpayer's benefits are taxable. Instead, one half of the portion of the benefits that belongs to the child must be added to the child's other income to see whether any of those benefits are taxable to the child.
Social security benefits are included in gross income only if the recipient's "provisional income" exceeds a specified amount, called the "base amount" or "adjusted base amount." There are two tiers of benefit inclusion. A 50-percent rate is used to figure the taxable part of income that exceeds the base amount but does not exceed the higher adjusted base amount. An 85-percent rate is used to figure the taxable part of income that exceeds the adjusted base amount.
Up to 50 percent of Social Security benefits could be included in taxable income if a recipient's provisional income is more than the following base amounts:
--$25,000 for single individuals, qualifying surviving spouses, heads of household, and married individuals who live apart from their spouse for the entire tax year and file a separate return; and
--$32,000 for married individuals filing a joint return;
--zero for married individuals who do not file a joint return and do not live apart from their spouse during the entire tax year
Up to 85 percent of benefits could be included in taxable income if a recipient's provisional income is more than the following adjusted base amounts:
--$34,000 for single individuals, qualifying surviving spouses, heads of household, and married individuals who live apart from their spouse for the entire tax year and file a separate return; and
--$44,000 for married individuals filing a joint return;
--zero for married individuals who do not file a joint return and do not live apart from their spouse during the entire tax year.
If the taxpayer's provisional income does not exceed the base amount, no part of Social Security benefits will be taxed. For taxpayers whose income exceeds the base amount, but not the higher adjusted base amount, the amount of benefits that must be included in income is the lesser of:
--One-half of the annual benefits received; or
--One-half of the amount that remains after subtracting the appropriate base amount from the taxpayer's provisional income.
Taxpayers whose provisional income exceeds the adjusted base amount must include in income the lesser of:
--85 percent of the annual benefits received; or
--85 percent of the excess of the taxpayer's provisional income over the applicable adjusted base amount plus the smaller of: (a) the amount calculated under the 50-percent rules above, or (b) one-half of the difference between the taxpayer's applicable adjusted base amount and the applicable base amount. One-half of the difference between the base amount and the adjusted base amount is $6,000 for married taxpayers filing jointly and $4,500 for other taxpayers. For taxpayers who are married, not living apart from their spouse, and filing separately, the amount will always be zero.
If you have any questions about the taxation of Social Security benefits, 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 can request a copy of their federal income tax return and all attachments from the IRS. In lieu of a copy of your return (and to save the fee that the IRS charges for a copy of your tax return), you can request a tax transcript from the IRS at no charge. A tax transcript is a computer print-out of your return information.
Taxpayers can request a copy of their federal income tax return and all attachments from the IRS. In lieu of a copy of your return (and to save the fee that the IRS charges for a copy of your tax return), you can request a tax transcript from the IRS at no charge. A tax transcript is a computer print-out of your return information.
Tax return copy
A copy of your tax return is exactly that: a copy of the return you filed with the IRS. According to the IRS, copies of individual tax returns are generally available for returns filed in the current year and the past six years. The IRS charges a fee of $57 to send taxpayers a copy of their return.
Requests for copies of tax returns should be filed on Form 4506, Request for Copy of Tax Return. The IRS has advised on its website that taxpayers should allow 60 days to receive a copy of their tax return.
Tax return transcript
A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules. However, a tax transcript does not show any changes the taxpayer or the IRS made after the return was filed. According to the IRS, a tax return transcript is generally available for the current and past three years.
Taxpayers can request transcripts online at the IRS web site, telephoning the IRS, or filing Form 4506T-EZ, Short Form Request for Individual Tax Return Transcripts. Businesses that need business-related information should file Form 4506-T, Request for Transcript of Tax Return. Taxpayers can request that the IRS send the transcript to their tax representative. The IRS reported on its website that transcript requests made online or by telephone generally will be processed within five to 10 days; transcript requests made by filing a paper form take longer to process.
Tax account transcript
The IRS also can provide a tax account transcript. This document shows basic data from the individual’s return and includes any adjustments the taxpayer or the IRS made after the return was filed. A tax account transcript is generally available for the current and past three years, according to the IRS and is provided at no-cost.
If you have any questions about the types of tax records available from the IRS, 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 start of the school year is a good time to consider the variety of tax benefits available for education. Congress has been generous in providing education benefits in the form of credits, deductions and exclusions from income. The following list describes the most often used of these benefits.
The start of the school year is a good time to consider the variety of tax benefits available for education. Congress has been generous in providing education benefits in the form of credits, deductions and exclusions from income. The following list describes the most often used of these benefits.
Exclusion From Income
Scholarships. A student enrolled in an educational program may receive a scholarship or fellowship to pay for all or part of the student‘s tuition and fees. These amounts are not included in the student‘s (or the parent’s) income. Need-based education grants, such as a Pell Grant, and tuition reductions are also excluded from income. However, amounts paid for work on campus may be taxable as compensation for services. Payments to cover room and board as opposed to tuition are also subject to tax.
Loan cancellation. Most students take out loans to pay for education expenses. Normally, if a debt is cancelled, the debtor has taxable income. However, if a student loan is canceled or reduced, the cancelled amount is not included in income.
Employer assistance. If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. Courses do not have to be related to your job. If they are related, further tax benefits may be available.
Education plans. Generally, amounts paid to establish an education plan, account or savings bond are not deductible. However, income on the account can grow tax-free (unlike a bank account, for example), and distributions of income from the account are not taxable if they are used for tuition and other qualified education expenses. These general rules apply to a Coverdell Education Savings Account (an education IRA), a qualified tuition program (QTP or “529 plan”), and certain U.S. savings bonds. In the last category or Series EE bonds issued after 1989 and Series I bonds. A qualified tuition program is established by a state and may provide payments for prepaid tuition or an account with tax-free earnings.
Tax Credits
LLC and AOTC. A lifetime learning credit (LLC) of up to $2,000 is available education expenses for a dependent for whom you claim an exemption. More recently, parents can claim an American Opportunity Tax Credit (AOTC) of up to $2,500 for college expenses paid for each eligible student. The current, enhanced level of the AOTC is scheduled to expire at the end of 2012, but the Obama administration has asked Congress to make it permanent.
Dependent care. Parents can take a credit for dependent care expenses paid so that they can work. Expenses for care do not include amounts paid for education. Expenses for a child in nursery school, pre-school, or similar programs for children below the level of kindergarten are expenses for care. Expenses to attend kindergarten or a higher grade are not expenses for care. However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be expenses for care, so that a credit can be claimed.
Deductions
Some deductions can be taken directly against gross income, in determining adjusted gross income. These are adjustments to income or “above-the-line“ deductions. Other deductions can only be taken as an itemized deduction. An above-the-line deduction is more valuable.
Above-the-line. Tuition expenses of up to $4,000 can be deducted directly against income. Tuition that also qualifies for one of the education tax credits, however, can be used only once, either for a credit or this above-the-line deduction. Ordinarily, interest paid is a nondeductible personal expense (other than home mortgage interests). However, interest paid on a student loan interest is deductible and can also be taken as an adjustment to income.
Itemized. Not all education-related expenses are deductible. However, a taxpayer may be able to claim a deduction for the expenses paid for your work-related education. The deduction will be the amount by which qualifying work-related education expenses exceed two percent of adjusted gross income. These expenses are added to other itemized deductions, to determine whether the taxpayer will itemize or claim the standard deduction.
Gift tax
Generally, a person making a gift must pay gift tax if the gift exceeds a specified amount ($13,000 currently). However, tuition paid directly to an educational institution to cover tuition for someone else’s benefit (e.g. a grandchild) is not taxable gift irrespective of amount. Prepaid tuition plans can qualify for this benefit.
A variety of educational benefits are available. In some cases, a deduction or a credit (but not both) may be available for the same payment. Thus, it is important to determine the exact requirements for each benefit and the amount of the benefit. Our office can help you determine how to maximize these benefits.
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 recent years, Congress has used the Tax Code to encourage individuals to make energy-efficient improvements to their homes. The credit is very popular. The Treasury Department estimates that more than 6.8 million individuals claimed over $5.8 billion in residential energy tax credits in 2009.
In recent years, Congress has used the Tax Code to encourage individuals to make energy-efficient improvements to their homes. The credit is very popular. The Treasury Department estimates that more than 6.8 million individuals claimed over $5.8 billion in residential energy tax credits in 2009.
The nonrefundable Code Sec. 25C tax credit was originally enacted on a temporary basis. Most recently, Congress renewed and modified the residential energy property tax credit in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) through 2011.
2011 rules
Under current law, the Code Sec. 25 tax credit provides a 10 percent credit for the purchase of qualified energy efficiency improvements to existing homes. A qualified energy efficiency improvement is any energy efficiency building envelope component:
Meeting or exceeding criteria for the component established by the 2009 International Energy Conservation Code or, in the case of certain windows, skylights and doors, and metal roofs, meeting Energy Star requirements;
Installed in or on a dwelling located in the United States and owned and used by the taxpayer as the taxpayer's principal residence;
Original use of which commences with the taxpayer; and
The qualified energy-efficient improvement reasonably can be expected to remain in use for at least five years.
Examples of energy-efficient improvements include, but are not limited to, qualified electric heat pumps, certain furnaces, metal roofs meeting certain criteria, certain types of exterior windows and doors. In some cases, only the cost of the energy-efficient improvement is eligible for the Code Sec. 25C tax credit; installation costs are ineligible. For example, the costs associated with installing a qualified electric heat pump are eligible for the Code Sec. 25C tax credit but costs associated with installing a qualified metal roof are ineligible.
Lifetime limits
The 2010 Tax Relief Act set the maximum Code Sec. 25C credit allowable is $500 over the lifetime of the taxpayer. The $500 amount must be reduced by the aggregate amount of previously allowed credits the taxpayer received in 2006, 2007, 2009, and 2010. This provision can complicate planning for the Code Sec. 25C credit because Congress made changes to the credit before and after 2009, particularly regarding the lifetime limit.
Let’s look at an example. Amanda qualified for a $400 Code Sec. 25C tax credit in 2006. The maximum credit allowable is $500 over her lifetime. This means that Amanda can get an additional Code Sec. 25C tax credit of up to $100 in 2011.
Under the 2010 Tax Relief Act, no more than $200 of the Code Sec. 25C credit may be attributable to expenditures on exterior windows and skylights. Taxpayers must reduce the $200 amount by the aggregate amount of previously allowed credits for windows and skylights that the taxpayer received in 2006, 2007, 2009, and 2010.
Dollar limits
Additionally, certain dollar limitations apply to various improvements. For property placed in service in 2011, the dollar limits are $300 for any item of qualified energy-efficient property; $50 for an advanced main air circulating fan; and $150 for any qualified natural gas, propane or oil furnace or hot water boiler.
Energy standards
Moreover, the qualified energy-efficient property must meet standards set by the by the 2009 International Energy Conservation Code (IECC). The 2010 Tax Relief Act treats exterior windows, skylights and exterior doors are qualified energy efficiency improvements if they meet the Energy Star Program requirements in 2011.
Certification statements
Many energy-efficient improvements come with a manufacturer’s certification statement. The statement indicates if the improvement qualifies for the tax credit. It is not necessary to submit a copy of the manufacturer’s certification statement with the individual’s tax return, but taxpayers should keep a copy of the certification statement for their records.
Another credit
The Code Sec. 25D tax credit also is intended to reward taxpayers for making certain energy-efficient improvements. The Code Sec. 25C tax credit covers items such as geothermal heat pumps, solar water heaters, solar panels, and small wind energy systems. Many of the rules for the Code Sec. 25D tax credit are similar to the Code Sec. 25C tax credit but there are some differences. For example, the Code Sec. 25D credit has no lifetime limit. If you are considering making one of these improvements, please contact our office for more details about this tax credit.
Form 5695
Taxpayers claim the Code Sec. 25C tax credit on Form 5695, Residential Energy Credits. The IRS has identified some abuses of the Code Sec. 25C tax credit and it intends to make revisions to Form 5695 to curb fraudulent claims and verify eligibility for the credit. These changes are expected to appear on the Form 5695 that taxpayers will file in 2012.
If you have any questions about the Code Sec. 25C tax credit, 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.
Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.
Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.
Business travel
You are considered “traveling away from home” for tax purposes if your duties require you to be away from the general area of your home for a period substantially longer than an ordinary day's work, and you need sleep or rest to meet the demands of work while away. Taxpayers who travel on business may deduct travel expenses if they are not otherwise lavish or extravagant. Business travel expenses include the costs of getting to and from the business destination and any business-related expenses at that destination.
Deductible travel expenses while away from home include, but are not limited to, the costs of:
Travel by airplane, train, bus, or car to/from the business destination.
Fares for taxis or other types of transportation between the airport or train station and lodging, the lodging location and the work location, and from one customer to another, or from one place of business to another.
Meals and lodging.
Tips for services related to any of these expenses.
Dry cleaning and laundry.
Business calls while on the business trip.
Other similar ordinary and necessary expenses related to business travel.
Business mixed with personal travel
Travel that is primarily for personal reasons, such as a vacation, is a nondeductible personal expense. However, taxpayers often mix personal travel with business travel. In many cases, business travelers may able to engage in some non-business activities and not lose all of the tax benefits associated with business travel.
The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business.
Let’s look at an example. Amanda, a self-employed architect, resides in Seattle. Amanda travels on business to Denver. Her business trip lasts six days. Before departing for home, Amanda travels to Colorado Springs to visit her son, Jeffrey. Amanda’s total expenses are $1,800 for the nine days that she was away from home. If Amanda had not stopped in Colorado Springs, her trip would have been gone only six days and the total cost would have been $1,200. According to past IRS precedent, Amanda can deduct $1,200 for the trip, including the cost of round-trip transportation to and from Denver.
Weekend stayovers
Business travel often concludes on a Friday but it may be more economical to stay over Saturday night and take advantage of a lower travel fare. Generally, the costs of the weekend stayover are deductible as long as they are reasonable. Staying over a Saturday night is one way to add some personal time to a business trip.
Foreign travel
The rules for foreign travel are particularly complex. The amount of deductible travel expenses for foreign travel is linked to how much of the trip was business related. Generally, an individual can deduct all of his or her travel expenses of getting to and from the business destination if the trip is entirely for business.
In certain cases, foreign travel is considered entirely for business even if the taxpayer did not spend his or her entire time on business activities. For example, a foreign business trip is considered entirely for business if the taxpayer was outside the U.S. for more than one week and he or she spent less than 25 percent of the total time outside the U.S. on non-business activities. Other exceptions exist for business travel outside the U.S. for less than one week and in cases where the employee did not have substantial control in planning the trip.
Foreign conventions are especially difficult, but no impossible, to write off depending upon the circumstances. The taxpayer may deduct expenses incurred in attending foreign convention seminar or similar meeting only if it is directly related to active conduct of trade or business and if it is as reasonable to be held outside North American area as within North American area.
Tax home
To determine if an individual is traveling away from home on business, the first step is to determine the location of the taxpayer’s tax home. A taxpayer’s tax home is generally his or her regular place of business, regardless of where he or she maintains his or her family home. An individual may not have a regular or main place of business. In these cases, the individual’s tax home would generally be the place where he or she regularly lives. The duration of an assignment is also a factor. If an assignment or job away from the individual’s main place of work is temporary, his or her tax home does not change. Generally, a temporary assignment is one that lasts less than one year.
The distinction between tax home and family home is important, among other reasons, to determine if certain deductions are allowed. Here’s an example.
Alec’s family home is in Tucson, where he works for ABC Co. 14 weeks a year. Alec spends the remaining 38 weeks of the year working for ABC Co. in San Diego. Alec has maintained this work schedule for the past three years. While in San Diego, Alec resides in a hotel and takes most of his meals at restaurants. San Diego would be treated as Alec’s tax home because he spends most of his time there. Consequently, Alec would not be able to deduct the costs of lodging and meals in San Diego.
Accountable and nonaccountable plans
Many employees are reimbursed by their employer for business travel expenses. Depending on the type of plan the employer has, the reimbursement for business travel may or may not be taxable. There are two types of plans: accountable plans and nonaccountable plans.
An accountable plan is not taxable to the employee. Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and federal employment taxes. Accountable plans have a number of requirements:
There must be a business connection to the expenditure. The expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his or her individual income tax return.
There must be adequate accounting by the recipient within a reasonable period of time. Employees must verify the date, time, place, amount and the business purpose of the expenses.
Excess reimbursements or advances must be returned within a reasonable period of time.
Amounts paid under a nonaccountable plan are taxable to employees and are subject to all employment taxes and withholding. A plan may be labeled an accountable plan but if it fails to qualify, the IRS treats it as a nonaccountable plan. If you have any questions about accountable plans, please contact our office.
As mentioned, the tax rules for business travel are complex. Please contact our office if you have any questions.
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.
With school out for the summer, parents are looking for activities for their children. The possibilities include sending a child to day camp or overnight camp. Parents may wonder whether these costs are deductible. At least two possible tax breaks come to mind: the dependent care credit, and the deduction for medical expenses. The most likely tax benefit is the child (or dependent) care credit.
With school out for the summer, parents are looking for activities for their children. The possibilities include sending a child to day camp or overnight camp. Parents may wonder whether these costs are deductible. At least two possible tax breaks come to mind: the dependent care credit, and the deduction for medical expenses. The most likely tax benefit is the child (or dependent) care credit.
Dependent care credit. To qualify for the dependent care credit, expenses must be employment-related. They must enable the parent to work or to look for employment. The IRS has indicated that the costs of sending a child to overnight camp are not employment-related. However, the costs of sending a child to day camp are treated like day-care costs and will qualify as employment-related expenses (even if the camp features educational activities). At the same time, the costs of sending a child to summer school or to a tutor are not employment-related and cannot be deducted.
In some situations, the IRS requires that expenses be allocated between child care and other, nonqualified services. However, the full cost of day camp generally qualifies for the dependent care credit, without an allocation being required. If the parent works part-time, camp costs may only be claimed for the days worked. However, if the camp requires that the child be enrolled for the entire week, then the full cost is qualified.
Example. Tom works Monday through Wednesday and sends his child to day camp for the entire week. The camp charges $50 per day and children do not have to enroll for an entire week. Tom can only claim $150 in expenses. However, if the camp requires that the child be enrolled for the entire week, Tom can claim $250 in expenses.
Dependent care costs also may be reimbursed by a flexible spending account (FSAs) under an employer-sponsored arrangement. FSAs allow pre-tax dollars to fund the account up to specified maximum. Each FSA may limit what it covers so check with your employer before assuming the day camp or similar child care is on its list of reimbursable expenses.
Medical expenses. The cost of camp generally is not deductible as a medical expense. The cost of providing general care to a healthy child is a nondeductible personal expense.
Example. The child’s mother works; the child’s father is ill and cannot take care of the child. The cost of sending the child to summer camp is not deductible as a medical expense; however, the costs may still qualify for the dependent care credit.
However, camps specifically run for handicapped children and operated to assist the child may come under the umbrella of medical expenses. The degree of assistance is usually determinative in these situations.
Dependency exemption. In any case, the cost of sending a child to camp can be treated as support, for claiming a dependency exemption. For a parent to claim a dependency exemption, the child cannot provide more than half of its own support. The parent must provide some support but does not necessarily have to provide over half of the child’s support. If the child is treated as a qualifying relative (because he or she is too old to be a qualifying child), the parent must still provide over half of the child’s support.
The rules on the deductibility of camp costs are somewhat complicated, especially in borderline situations. Please check with this office if you have any questions.
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 more retirees and others wanting guarantee income are looking into annuities, especially given the recent experience of the economic downturn. While the basic concept of an annuity is fairly simple, complex rules usually apply to the taxation of amounts received under certain annuity and life insurance contracts.
Many more retirees and others wanting guarantee income are looking into annuities, especially given the recent experience of the economic downturn. While the basic concept of an annuity is fairly simple, complex rules usually apply to the taxation of amounts received under certain annuity and life insurance contracts.
Amounts received as an annuity are included in gross income to the extent that they exceed the exclusion ratio, which is determined by taking the original investment in the contract, deducting the value of any refund features, and dividing the result by the expected yield on the contract as of the annuity starting date. In general, the expected return is the product of a single payment and the anticipated number of payments to be received, i.e., the total amount the annuitant(s) can expect to receive. In the case of a life annuity, the number of payments is computed based on actuarial tables.
If the annuity payments are to continue as long as the annuitant remains alive, the anticipated number of payments is based on the annuitant's (or annuitants') life expectancy at the birthday nearest the annuity starting date. The IRS provides a variety of actuarial tables, within unisex tables generally applicable to all contracts entered into after June 1986. The expected return multiples found in the actuarial tables may require adjustment if the contract specifies quarterly, semiannual or annual payments or if the interval between payments exceeds the interval between the annuity starting date and the first payment.
In connection with annuity calculations, one recent tax law change in particular is worth noting. Under the Creating Small Business Jobs Act of 2010, enacted on September 27, 2010, if amounts are received as an annuity for a period of 10 years or more or on the lives of one or more individuals under any portion of an annuity, endowment, or life insurance contract, then that portion of the contract will now be treated as a separate contract for tax purposes. As result, a portion of such an annuity, endowment, or life insurance contract may be annuitized, while the balance is not annuitized. The allowance of partial annuitization applies to amounts received in tax years beginning after December 31, 2010.
If you need help in "crunching the numbers" on an annuity, or if you'd like advice on what annuity options might best fit your needs, please do not hesitate to 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.
