Taxpayers who convert a traditional IRA to a Roth IRA must include the amount transferred in their gross income and pay tax accordingly. For the 2010 tax year, the IRS created spec...
Taxpayers whose employers provide company cars (or trucks and vans) for their personal use must factor that usage into their gross income. Personal use of a vehicle provided by an employer is consi...
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...
Recent IRS regulations provide that damages received from a lawsuit or settlement as compensation for personal physical injuries or sickness may be excluded from gross income, even...
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...
The Pennsylvania Department of Revenue (DOR) has issued a corporate income tax bulletin addressing the application of restricted credits and requirements for selling tax credits. S...
The proposed regulations will eliminate the paper coupon deposit system as of December 31, 2010. Accordingly Form 8109 (preprinted) or Form 8109-B (blank), the blue Federal Tax Deposit Coupons, can longer be used to make federal tax payments at your banking institution beginning January 1, 2011. These are used primarily for payroll tax or corporate net income tax deposits.
Under the proposed regulations, instead of using paper deposit coupons, payments must be made online or by telephone, using the federal Electronic Federal Tax Payment System (EFTPS). When using the EFTPS system, payments can be made 24 hours a day and seven days a week. Payments can also be scheduled up to 120 days in advance, so payments can be scheduled prior to vacations and business trips. If a payment date is a Saturday, Sunday or legal holiday, taxes will be considered as being timely deposited when made the next business day.
If you already use a third-party payroll service to impound and electronically pay your payroll taxes, that system will remain in effect. But any other federal tax payments are subject to these new regulations.
To use EFTPS, you must enroll online at www.eftps.gov and provide your EIN and bank account information. After enrollment, you will receive your PIN by mail in approximately seven days. (Note: Do not wait until the last week of December to enroll!) After you receive your PIN, call 1-800-982-3526 to receive your temporary internet password. You will reset the password when you log-in for the first time. There are step-by-step instructions to follow to schedule your payments after you log-in. Be sure to save a copy of your Payment Confirmation page when finished - this is your receipt of payment. If you need assistance, the EFTPS Customer Service telephone number is 1-800-555-4477.
What taxes must be paid by EFTPS as of January 1, 2011?
•Corporate income taxes •Corporate estimated income taxes •FICA taxes and withheld income taxes •Federal Unemployment Tax Act taxes (FUTA) •Unrelated business income taxes of tax-exempt organizations •Excise taxes reportable on Form 720
Required IRS Electronic Payment System (continued)
•Backup withholding for independent contractors •Private foundation excise taxes •Taxes withheld on nonresident aliens and foreign corporations •Estimated taxes on certain trusts •Railroad retirement taxes Are there any exceptions for depositing the above taxes using EFTPS?
•Employers with a payroll tax deposit liability which is always less than $2,500 for each return period will continue to be permitted to pay their employment taxes with their quarterly or annual returns (i.e., Forms 941/945).
Note: In some cases, companies are opening a separate bank account to segregate the cash set aside for tax payments from the accounts holding their operating and invested funds.
As always, if you need further information or if we can be of further assistance, please do not hesitate to contact our office.
Section 9006 of the Patient Protection and Affordable Care Act of 2010, which was signed into law on March 23, 2010, made a couple of small word changes to the current "Form 1099-MISC law" which will have a huge impact on the information reporting burden of businesses and not-for-profit organizations.
First, as previously mentioned, under current law you do not have to issue a Form 1099-MISC if the payee is a corporation. Starting in 2012, you will have to issue a Form 1099-MISC even if the payee is a corporation - although a Form 1099-MISC is not required to be issued to a not-for-profit organization.
Second, instead of issuing a Form 1099-MISC for only payments of rents and nonemployee compensation, starting in 2012, you will also have to issue a Form 1099-MISC for payments with respect to purchases of property, such as inventory, equipment and supplies. This includes construction sub-contractors who provide combinations of services and materials. So, many businesses will be faced with issuing a Form 1099-MISC for virtually anything bought that costs over $600 yearly like, apparently, even phone service.
For example, starting in 2012, the new law provides that if you buy a $600 computer from Wal-Mart in the course of your trade or business you have to issue Form 1099-MISC to Wal-Mart since you made a payment to Wal-Mart with respect to the purchase of property.
Just recently the Internal Revenue Service (IRS) said that they intend to issue guidance that will implement these changes in a manner that minimizes burden and avoids duplicate information reporting requirements. For example, if you bought the computer
from Wal-Mart with a debit or credit card you would not have to issue a Form 1099-MISC because the debit/credit card transaction will already be subject to it own information reporting requirement. That is, the bank or credit card company has to report their payments to Wal-Mart starting next year.
We want you to be aware (and beware) of the additional administrative yearly burden that the new law will place on your business. We believe it’s not too early to develop a plan for the orderly gathering of a significant number of additional vendors’ taxpayer ID information.
As it now stands, starting in 2012 you will need the names, addresses and taxpayer ID numbers of a lot more suppliers. Use IRS Form W-9 to get their information so you can issue them a Form 1099-MISC for 2012.
You could start now with every new vendor you use. Then plan for a process of evaluating every current vendor file to see if you have a taxpayer ID number on file. Those lacking will need updated to meet the 2012 issuance deadline of January 31, 2013.
Social Security Tax Forgiveness
Under the new HIRE Act, a qualified employer is exempted from paying its portion of the Social Security payroll taxes (6.2% of gross wages) for wages paid to a qualified employee between March 18, 2010 and December 31, 2010.
Under this Act, a “qualified employer” includes both taxable businesses and tax-exempt organizations.
A “qualified employee” is an individual who was hired by the qualified employer after February 3, 2010, but before December 31, 2010 and who had been unemployed during the 60-day period prior to date of hire OR worked less than a total of 40 hours in the 60-day period prior to date of hire. This individual also must not have been hired to replace another employee, unless the other employee separated voluntarily from the employer, or was terminated for cause. Family members of the employer do not count as a qualified employee. Qualified employees can be employed on either a full-time or part-time basis. They can also be individuals who were previously employed by the qualified employer, but had been laid off - - as long as they worked less than 40 hours in the 60-day period prior to their date of re-hire.
The employer is basically being given an exemption from paying 6.2% of the gross wages (up to the Social Security wage base of $106,800) being paid to qualified employees. This amount represents the usual mandatory amount that employers pay for Social Security tax on their employees’ wages. This tax forgiveness eliminates the employer’s portion entirely for wages paid between March 18, 2010 and December 31, 2010. It is important to note, however, that the employer is still required to withhold and remit the EMPLOYEE portion of the Social Security tax.
The tax forgiveness is claimed on the employer’s quarterly federal tax return, Form 941, starting with the second calendar quarter of 2010. The exemption on wages paid between March 18 and March 31, 2010 (which would usually be included in the first quarter 941) will also be claimed on the second quarter 2010 Form 941. There is a revised Form 941 with a line for this credit available on the IRS website, http://www.irs.gov. Additionally, the amount of wages covered by this payroll tax exemption is required to be reported in box 12 of the employee’s 2010 Form W-2
If you use a payroll service, make sure you report this information to them.
Documentation Requirements The employer is required to obtain an affidavit from each qualified employee that certifies under penalty of perjury that he or she was not employed for more than 40 hours during the 60 days before beginning employment with the employer. The IRS created Form W-11 which can be used for this purpose. While this form is not required to be filed with the IRS, the employer must retain the form in the employee’s file and must have obtained it prior to filing the Form 941 on which the credit is being claimed.
Finally, it is important to note that the qualified employer can NOT take both the social security tax exemption and the Work Opportunity Tax Credit (WOTC) on the same individual. The employer must choose one or the other. The WOTC is targeted generally to unemployed veterans or younger people (16-24) who have not been regularly employed. The maximum credit is $2,400 (40% of the first 6,000 of gross wages).
Also worth noting is that this tax forgiveness does NOT apply to the employer portion of Medicare tax (1.45% of gross wages).
Business Tax Credit
The second incentive under the HIRE Act is a business tax credit for retaining the same qualified employees (as defined above) for a 52-week consecutive period. The business tax credit is calculated on EACH qualified worker retained for 52 consecutive weeks and is the lesser of: $1,000 OR 6.2% of wages paid to the qualified employee during the 52-week period.
Each qualified employee that is retained for 52 consecutive weeks generates a credit for the employer. This credit will be claimed on the employer’s 2011 tax return, since the law was passed during 2010, and part of the stipulation for claiming the credit is that the worker is retained for 52 consecutive weeks, which would span into calendar year 2011.
Again, this credit applies to both full-time and part-time employees. As long as the employee earns more than $16,129 over the course of the 52 weeks, they will qualify for the full $1,000 credit on the employer’s tax return (6.2% of $16,129 is $1,000).
In an effort to prevent manipulation of the credit, the qualified retained worker must be paid at least 80% of his first 26 weeks worth of wages during the last 26 weeks of the 52-week period. For example, if a worker is retained for 52 weeks, and during the first 26 weeks he is paid $26,000, but over the last 26 weeks he is only paid $20,000, that worker would NOT qualify for the credit because $20,000 is only 77% of the $26,000 of wages he earned during the first 26-week period.
The qualified retained worker MUST stay on the job for AT LEAST 52 consecutive weeks for the employer to claim the credit on that employee. Even if the worker voluntarily leaves prior to completing 52 weeks, the employer is not permitted to claim the credit for that employee.
Possible Issues Converting an independent contractor to an employee is a possible strategy that is not specifically covered by the Act but will probably be tested and perhaps litigated.
The IRS Section 179 first year write off of equipment was scheduled to be limited to $125,000 for those businesses which spent no more than $500,000 on new equipment in 2010. The limit has been increased to $250,000 first year write off for those businesses which spend less than $800,000 in 2010 (this is now consistent with the rules in effect for 2008 and 2009). If $800,000 is exceeded, the first year's write off is lost dollar for dollar up to $1,050,000 in total purchases).
It is available for both new and used qualifying equipment and also off the shelf computer software.
It is calculated based on the business tax year, not the calendar year for fiscal year taxpayers.
The "bonus" depreciation system which allowed a 50% write off on new qualifying equipment in 2008 and 2009 was not extended to 2010.
Small Employers Health Care Insurance Tax Credit
You may have heard about a tax credit for small employers that provide health insurance coverage for their employees. We are writing to tell you that you should pay attention to this possible tax credit. Why? Because immediate proactive management may result in your company qualifying for, or increasing the amount of this tax benefit. This means savings of up to 35% of your health care insurance bill in 2010 may be received as a tax credit.
An important aspect is that you do not have to pay income taxes to get c the credit. Nonprofit organization can get a "refundable" cash tax credit for health insurance cost (at a 25% rate). For businesses, the credit (at a 35% rate) can be taken against 2010 income tax or if not all used, can be carried back one year or forward 20 years; it could also be considered when making estimated tax payment calculations.
On March 23, 2010, the Patient Protection and Affordable Care Act was signed into law. It has far-reaching provisions for businesses and individuals, some of which affect smaller businesses in 2010. Most provisions will increase costs and/or taxes. However, one that could prove beneficial is the Small Employers Health Care Insurance Tax Credit (formally the Tax Credit for Employee Health Insurance Expenses of Small Employers).
In summary, to qualify for this tax credit you must:
•Pay at least 50% of the cost of individual health care premium coverage for your employees. •Have fewer than 25 full time equivalent employees. •Pay average wages to non-owners of less than $50,000/employee.
Of course, the devil is in the details. For example,
•Sole proprietors, partners, shareholders owning more than 2% of an S corporation and 5% owners of other businesses are not taken into consideration when determining your businesses eligibility for this credit.
•Service hours "worked" (including vacation, sick and holiday pay) must be aggregated and divided by a standard annual hourly rate of 2,080 hours to determine the number of full time equivalent employees. Special rules apply for seasonal workers.
•Round down your calculations of full time equivalent employees to the nearest whole number; round down your calculation of average wages to the nearest $1,000.
•The full 35% credit is for employers with fewer than 11 employees and less than $25,000 average salary.
•If you employ between 11-25 full time equivalent employees, or have average employee wages of $25,000 to $50,000, the credit is subject to a reduction phase out calculation.
•Medical premiums used in calculations can't exceed IRS-published small group market state or regional rates.
We could go on. The calculations are very complex and most include all businesses in a controlled group. It took us approximately 8 hours to prepare an estimated calculation for a client. The final calculation will be done with your 2010 business income tax return. The IRS is trying to figure out how tax exempts will claim the credit.
However, the important thing is to begin gathering the necessary data to make a preliminary calculation. You may be able to affect the level of your eligibility by delaying hiring, outsourcing services or timing wage increases in a manner that will qualify your business for up to a 35% reduction in its health care insurance bill.
It is our view that, if these enacted tax increases are not somehow stopped, there will be a drastic change in the public arena in how new public companies are organized. Since S corporations can not have more than 100 shareholders, the use of publically traded partnerships, is the obvious choice to organizers of businesses in order to eliminate double taxation.
The dilemma for current non-public C corporations is what to do. Conversion to S corporation structure for 2011 is an obvious choice, assuming no significant built-in gains exist because such gains would be taxed at a 35% rate upon conversion or subsequent sale of assets within 10 years after conversion date.
But, what about already taxed C corporations' retained earnings? This applies both to C corporations and S corporations that were formerly C corporations which had accumulated earnings at date of conversion.
We believe this abnormal regulatory environment calls for serious consideration of abnormal tax planning strategies - namely accelerating tax liabilities! Our recommendation is to take immediate action steps to permit a distribution of such already-taxed earnings by paying dividends to shareholders prior to December 31, 2010. Dividends can be either in cash or property (at fair market value). In this way, the shareholders would pay the 15% Federal tax rate now and avoid the confiscatory 41% to 45% tax rates beginning in seven months.
This often will require restructuring borrowing agreements to allow the payment of dividends up to the amount of the previously taxed earnings. For construction contractors, bonding agreements also will be important to consider. We expect that such bank and bonding negotiations may result in a substantial portion of the unusual dividend having to be loaned back to the corporation and structured as subordinated debt in order to satisfy equity demands or debt/equity ratio requirements. But, at least the tax is paid at a 2/3 savings. And, with prudent financial planning, the debt should be repayable to the shareholders with no tax consequence over a period of years.
(Interest would have to be paid on the debt at rates that are in accordance with IRS tables. These rates are less than normal commercial market interest rates. For example, the current rate for intermediate term (over 3 but less than 9 years) related party debt is approximately 2.7 %.)
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.
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.
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.
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.
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.
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.