In between preparing for the year-end holidays, school vacations, travel, work, and so on, tax planning should not be on the back burner. Although 2015 is quickly coming to a close, there is still time, with careful planning, to execute some last minute tax strategies. In many cases, these strategies can help minimize the tax burden. Of course, every individual’s situation is different, so please contact our office for specific details about a year-end tax planning strategy customized to you.

In between preparing for the year-end holidays, school vacations, travel, work, and so on, tax planning should not be on the back burner. Although 2015 is quickly coming to a close, there is still time, with careful planning, to execute some last minute tax strategies. In many cases, these strategies can help minimize the tax burden. Of course, every individual’s situation is different, so please contact our office for specific details about a year-end tax planning strategy customized to you.

Extenders

For many taxpayers, one of the most significant questions looming over 2015 returns is will they be able to claim all the deductions, credits and incentives that were available in 2014? Many of these incentives are grouped in a package known as the tax extenders. If you have taken in 2014 (or in a prior year) the state and local sales tax deduction, higher education tuition deduction, teacher’s classroom expense deduction, IRA distribution to charity, among others, you enjoyed the benefit of a tax extender.

Under current law, these popular tax breaks expired after 2014. That means they are no longer available for 2015, unless they are renewed by Congress. At this time, it is highly likely that Congress will vote to extend the extenders at least for 2015. Congress could approve a two-year extension. A vote is expected before January 1, 2016. However, Congress could delay the vote until early January. Uncertainty is never far from the extenders, but the best approach is to develop a year-end planning strategy that reflects both an extension of the extension and develop another plan that does not.

For example, qualified taxpayers contemplating making a gift to a charitable organization should take into account renewal of the tax break for gifts to charity from an IRA. If all the requirements are met, this may be a valuable tax break. However, there are other avenues for gifts to charity that can help maximize tax savings if you do not qualify for the deduction or the deduction is not renewed. Also, keep in mind the rules for substantiating gifts to charity. You do not want to lose the tax benefit of a generous gift to charity because these substantiation rules were not followed. Our office can explore these strategies with you.

While taxpayers wait for action on the extenders, tax bills already passed in 2015 could be valuable. The Defending Public Safety Employees’ Retirement Act expands the exemption from the penalty for early retirement withdrawals to include certain federal law enforcement officers, federal firefighters, customs and border protection officers, and air traffic controllers. The Surface Transportation Act of 2015 provides that a veteran’s eligibility to contribute on a pre-tax basis to a health savings account (HSA) is not affected by receipt of medical care from the VA for a service-connected disability.

Traditional techniques

The roster of traditional year-end tax planning strategies is lengthy and often involves methods to shift income between 2015 and 2016. To postpone income to 2016, taxpayers can consider delaying plans to sell appreciated assets, redeem U.S. savings bonds, completing Roth IRA conversions, and so on. If possible, it may be worthwhile to postpone any bonuses until after 2015. In contrast, some taxpayers may want to accelerate income into 2015. This can be particularly valuable if a taxpayer expects to be in a higher tax bracket in 2016 compared to 2015.

When considering traditional year-end techniques, keep in mind the 3.8-percent net investment income (NNI) tax. The NII tax applies to the lesser of (1) an individual’s net investment income (NII) or (2) the excess of the individual’s modified adjusted gross income (MAGI) over the threshold amount. The thresholds are $250,000 for married taxpayers filing a joint return and surviving spouses; $125,000 for married taxpayers filing a separate return; and $200,000 for all other taxpayers.

Gift-making

Gift-making is an important year-end tax strategy that can be overlooked. The Tax Code allows taxpayers to give away up to an “annual exclusion amount” per recipient per year free of gift tax. For 2015, the annual exclusion amount is $14,000. If property is given instead of cash, the value of the gift is the fair market value of the property. If spouses consent to split all gifts that are made by either one of them during any year and each spouse is also a U.S. citizen or resident, then the gifts can be deemed as having been made one half by each spouse. As a result, spouses who consent to split their gifts can transfer twice the annual per-recipient exclusion amount each year, free of gift tax ($28,000 for 2015).

These are just some of the tax strategies to consider before year-end. Please contact our office for more details.

The new Bipartisan Budget Act of 2015, signed into law by President Obama in November, makes some far-reaching changes to partnership audits along with repealing automatic enrollment in health plans under the Affordable Care Act (ACA). The new law is a good preview of how Congress is looking to enhanced tax compliance as a revenue raiser. The tax compliance measures in the budget law, largely targeted to partnerships, are projected to generate more than $10 billion in revenue over 10 years.

The new Bipartisan Budget Act of 2015, signed into law by President Obama in November, makes some far-reaching changes to partnership audits along with repealing automatic enrollment in health plans under the Affordable Care Act (ACA). The new law is a good preview of how Congress is looking to enhanced tax compliance as a revenue raiser. The tax compliance measures in the budget law, largely targeted to partnerships, are projected to generate more than $10 billion in revenue over 10 years.

TEFRA repeal

More than 30 years ago, Congress passed the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). The law was intended to help the IRS better audit partnerships. For many years, TEFRA worked as intended. However, as partnerships have grown in number and complexity since passage of TEFRA, the IRS has been challenged to keep up with the changes. Today, it is not uncommon for partnerships subject to TEFRA to have hundreds or even thousands of partners.

The TEFRA rules generally applied to partnerships with more than 10 partners. Partnerships with 10 or fewer partners are audited as part of each partner’s individual audit. Additionally, partnerships with 100 or more partners that elect to be treated as Electing Large Partnerships (ELPs) are subject to a unified audit under which any adjustments are reflected on the partners’ current year return rather than on an amended prior-year return.

The Budget Act repeals the TEFRA and ELP rules (with a delayed effective date, discussed below). The Budget Act replaces TEFRA with a streamlined structure for auditing partnerships and their partners at the partnership level.

As mentioned above, the TEFRA repeal is not officially effective immediately. Rather, the changes made by the 2015 Budget Act apply to returns filed for partnership tax years beginning after 2017. However, subject to certain exceptions, partnerships may choose to apply the new rules in the Budget Act to any partnership tax year beginning after the date of enactment, which is November 2, 2015.

According to the Joint Committee on Taxation (JCT), repeal of TEFRA will generate more than $9 billion in revenue over 10 years. Revenue is expected to be raised through enhanced audits of partnerships. The partnership universe is very large. For 2012, partnerships passed through $1,400.8 billion in total income minus total deductions available for allocation to their partners.

The Budget Act also clarifies that Congress did not intend for the family partnership rules to provide an alternative test for whether a person is a partner in a partnership. The determination of whether the owner of a capital interest is a partner should be made under the generally applicable rules defining a partnership and a partner. Further, the 2015 Budget Act clarifies that a person is treated as a partner in a partnership in which capital is a material income-producing factor whether the interest was obtained by purchase or gift and regardless of whether the interest was acquired from a family member. According to the JCT, this provision is projected to raise more than $1 billion over 10 years, again through enhanced compliance.

Affordable Care Act

One of the goals of the ACA was to expand enrollment in health insurance plans. For employers with more than 200 full-time employees, the ACA required them to automatically enroll new full-time employees in one of the employer’s health benefits plans (subject to any authorized waiting period), and to continue the enrollment of current employees in a health benefits plan offered through the employer. The ACA was passed in 2010 but the IRS has not issued any regulations. In fact, the IRS announced in 2012 that it was holding off on the issuance of regulations.

The 2015 Budget Act repeals the ACA’s requirement for automatic enrollment in health insurance plans. In this case, repeal is effective as of the date of enactment of the new law: November 2, 2015.

Pension plans

The Budget Act also impacts defined benefit (DB) pension plans. These are traditional pension plans maintained by employers. Current law requires DB plans to make a contribution for each plan year to fund plan benefits. The Budget Act extends funding stabilization rules for DB plans through 2019. The Budget Act also gives DB plans some flexibility in their use of mortality tables. Additionally, the Budget Act increases premiums paid by pension plans to the Pension Benefit Guaranty Corporation (PBGC).

If you have any questions about repeal of TEFRA or any of the provisions in the Budget Act, please contact our office.

Tucked into the pending highway and transportation spending bill is a provision authorizing the IRS to outsource some tax collection activities. If this sounds familiar, it is. Several times in the past 20 years, the IRS has contracted with private sector debt collection agencies for tax collection work. The results have been mixed, but as lawmakers scramble for money to pay for highway and transportation spending, the potential for significant revenue is attractive.

Tucked into the pending highway and transportation spending bill is a provision authorizing the IRS to outsource some tax collection activities. If this sounds familiar, it is. Several times in the past 20 years, the IRS has contracted with private sector debt collection agencies for tax collection work. The results have been mixed, but as lawmakers scramble for money to pay for highway and transportation spending, the potential for significant revenue is attractive.

Note: At the time this article was posted, House and Senate conferees were still negotiating a final highway bill. The exact parameters of private tax collection will be known when conferees complete their work and both the House and Senate pass the conference agreement.

Highway bill

To pay for a multi-year highway and transportation spending bill, lawmakers turned to tax compliance measures rather than increasing taxes, such as the federal gasoline tax. Privatization of some tax collection work is one such compliance measure. According to supporters, the outsourcing of tax collection would raise more than $2 billion over 10 years. That number has been questioned by opponents.

Privatization

In 2004, Congress passed the American Jobs Creation Act, which granted the IRS the authority to contract out the collection of past due taxes to private collection agencies. Two years later, the IRS began assigning taxpayer cases to the private collection agencies. At that time, the IRS assigned only certain types of cases to private collection agencies. These generally were cases that involved an individual taxpayer with a balance due of $25,000 or less (sometimes higher in certain cases). The cases fell into three categories: accounts awaiting assignment to the collection field function but not being worked; accounts not being worked due to IRS resource limitations; and cases where the IRS could not contact or locate the taxpayer.

According to the IRS, it placed approximately $1.8 billion in outstanding tax debts with the private agencies for collection over two years. The National Taxpayer Advocate reported that the private collection agencies recovered some $86.2 million during those two years.

The private agencies worked taxpayer accounts with many restrictions. The private agencies could not determine or negotiate the amount of a taxpayer’s debt. In addition, the private agencies could not negotiate a taxpayer’s debt. If a taxpayer requested that his or her account be returned to the IRS and no longer worked by the private agency, the agency had to comply.

Moreover, the private collection agencies had to operate within rules set by the Federal Trade Commission and the Fair Debt Collection Practices Act. This meant, for example, that the agencies could only contact individuals during certain times of the day. The Fair Debt Collection Practices Act also prohibits collection agencies from misrepresenting an individual’s legal rights, disclosing personal information to third parties (unless authorized), and obtaining information through false pretenses.

Resurrected program

If privatization of tax debts returns, the program will likely operate in a similar manner as it did under the 2004 Jobs Act. The IRS will need to develop rules for the working of taxpayer cases by private collection agencies. The IRS also will solicit bids from interested collection agencies. The process is likely to be a slow one.

If you have any questions about the outsourcing of tax collection, please contact our office.

A business that has employees must withhold income taxes on payments to each employee. Each employee must first fill out Form W-4, Employee’s Withholding Allowance Certificate, and provide it to the employer. On the form the employee can claim exemptions, such as the personal exemption or an exemption for a spouse or child, and determine the number of withholding allowances for the employee. Based on that information, the employer calculates the employee’s income tax withholding for the year.

A business that has employees must withhold income taxes on payments to each employee. Each employee must first fill out Form W-4, Employee’s Withholding Allowance Certificate, and provide it to the employer. On the form the employee can claim exemptions, such as the personal exemption or an exemption for a spouse or child, and determine the number of withholding allowances for the employee. Based on that information, the employer calculates the employee’s income tax withholding for the year.

The employer next must select a withholding method. The amount of taxes withheld can be determined using the percentage method; the wage bracket method; the alternative formula table method; or any other method that produces substantially the same amount as the wage bracket method. These methods are based upon tables produced by the IRS and available in IRS publication Circular E, Employer’s Tax Guide.

Percentage Method

The employer must select one of eight tables, based on the payroll period used by the employer, such as weekly, monthly, annually, etc. If the employer does not use a payroll period, it should use the daily or miscellaneous table. Each table is divided into two parts: one for single people, and one for married people.

After determining the appropriate table, the employer must determine the amount of wages to use as the base calculation. This amount is determined by subtracting the number of withholding allowances from the employee’s total gross wages for the payroll period. The result is net wages subject to withholding. The result is used in the withholding tables to determine the withholding amount.

Wage Bracket Method

For each employee, the employer again must determine the payroll period, wages paid during the period, withholding exemptions, and marital status. The wage bracket tables calculate the income tax to deduct and withhold by using gross wages, with no deduction for an exemption amount. This method is supposed to produce similar results to the percentage method.

The wage bracket method cannot be used if the payroll period is quarterly, semiannual, or annual, because there are no tables for these periods.

Other methods

The third method—alternative formula tables—is for employers using computerized accounting systems. The fourth method is allowed if it produces substantially similar results to the wage bracket method. The IRS provides a table for determining whether a result is substantially similar.

Other Employment Taxes

Employers must also determine FICA (Federal Insurance Contributions Act [Social Security]) and Federal Unemployment Tax Act (FUTA) taxes.

FICA consists of two taxes: the old-age, survivors and disability insurance (OASDI) tax, equal to 6.2 percent on both the employer and employee; and the hospital insurance (HI) tax, equal to 1.45 percent on both the employer and the employee. FICA taxes thus have a combined rate of 7.65 percent. The OASDI tax is subject to a wage limit, set at $118,500 for 2015 and 2016, but subject to increase. Wages above that limit are exempt from the OASDI tax. However, there is no limit on the HI tax; all wages are taxed 1.45 percent. The IRS provides tables to determine FICA taxes.

If the employee has wages in excess of $200,000, the employer must also withhold the Additional 0.9 percent Medicare tax from all wages above that threshold.

FUTA tax is 6 percent of all wages paid during the calendar year, up to a $7,000 wage limit. These amounts are owed by the employer and are not deducted from the employee’s wages. The employer can claim a credit for contributions to state unemployment insurance funds. The maximum credit is 90 percent of the 6 percent rate, or 5.4 percent.

An S corporation can own an interest in another business entity. It can also be a partner in a partnership or a member of a limited liability company (LLC). An S corporation can own 80 percent or more of the stock of a C corporation, which can elect to join in the filing of a consolidated return with its affiliated C corporations. However, an S corporation is ineligible to be a member of the affiliated group and to join in the election to file a consolidated return.

An S corporation can own an interest in another business entity. It can also be a partner in a partnership or a member of a limited liability company (LLC). An S corporation can own 80 percent or more of the stock of a C corporation, which can elect to join in the filing of a consolidated return with its affiliated C corporations. However, an S corporation is ineligible to be a member of the affiliated group and to join in the election to file a consolidated return.

The primary mechanism for ownership of another entity is for an S corporation to own a subsidiary S corporation, known as a qualified Subchapter S subsidiary. The subsidiary must be otherwise eligible to be an S corporation if the parent’s shareholders directly owned the subsidiary’s stock. The parent S corporation must own the subsidiary’s stock directly and must own 100 percent of the subsidiary’s stock.

Finally, the parent must elect, on Form 8869, to treat the corporation as a qualified Subchapter S subsidiary. The election of qualified S corporation subsidiary status results in a deemed liquidation of the subsidiary into the parent. If the election later is revoked or terminates, the former subsidiary is treated as a new corporation that acquired all of its assets and assumed all of its liabilities immediately before the termination.

For tax purposes, the separate existence of the subsidiary is ignored. All the assets, liabilities and items of income, deduction or credit of the subsidiary are treated as belonging to the parent S corporation. However, the subsidiary is treated as a separate entity for employment tax liabilities paid in 2009 or later, and certain excise taxes paid in 2008 or later. If the subsidiary was a separate corporation before joining with the parent, the subsidiary remains liable for any taxes that arose during the period when it was separate.

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 December 2015.

December 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 25–27. 

December 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 28–December 1. 

December 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 2–4. 

December 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. 

December 11
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 5–8. 

December 15
Corporations. Calendar-year corporations deposit the fourth installment of estimated income tax for 2015; use worksheet, Form 1120-W. 

December 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 9–11. 

December 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 12–15. 

December 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 16–18. 

December 28
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 19–22. 

December 30
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 23–25. 

January 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 26–29.

January 6
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 30–31.

The fate of many of the tax incentives taxpayers have grown accustomed to over recent years will likely remain up in the air until Congress and the Administration finally face off weeks before year-end 2012. While the results of Election Day will have bearing on the outcome, no crystal ball can predict how the ultimate short-term compromise will unfold. As a result, some year-end tax planning must be deferred and executed ”at the eleventh hour” only after Congress passes and the President signs what will likely result in a stopgap, temporary compromise for 2013. Tax rates for higher-bracket individuals and a long list of “extenders” provisions such as the child tax credit, the enhanced education credits and the optional deduction for state and local sales tax, hang in the balance. Real tax reform for 2014 and beyond, in any event, won’t be hammered out until 2013 is well underway.

The fate of many of the tax incentives taxpayers have grown accustomed to over recent years will likely remain up in the air until Congress and the Administration finally face off weeks before year-end 2012. While the results of Election Day will have bearing on the outcome, no crystal ball can predict how the ultimate short-term compromise will unfold. As a result, some year-end tax planning must be deferred and executed ”at the eleventh hour” only after Congress passes and the President signs what will likely result in a stopgap, temporary compromise for 2013. Tax rates for higher-bracket individuals and a long list of “extenders” provisions such as the child tax credit, the enhanced education credits and the optional deduction for state and local sales tax, hang in the balance. Real tax reform for 2014 and beyond, in any event, won’t be hammered out until 2013 is well underway.

Traditional Planning for Individuals

2012 year-end legislation clearly plays a major role in 2012 year-end tax planning for many taxpayer. Nevertheless, traditional year-end tax planning should not be overlooked in the meantime. In many cases, attention to traditional considerations, now, will prove more important to a majority of taxpayers’ bottom line. Here is a checklist of some traditional year-end planning considerations not to be overlooked:

• Changes in filing status: marriage, divorce, death of a spouse, or a change in head-of-household status during 2012 (or anticipated for 2013) will impact on your tax bracket and bottom line tax liability. Anticipate the additional expense or lower tax bill that a change in filing status may bring.
• Birth of a child, adoption, combined families through re-marriage, and even the ages of children in 2012 and 2013 can matter to year-end tax planning. Dependency exemptions in some instances depend upon the amount of support provided within the tax year. The ability to take advantage of the child tax credit, the child-care credit, the earned income credit, application of the kiddie tax, and the ability to be covered under a parent’s health insurance under the new health care law in part hinges upon how a “child” is defined within certain age limits (varying from under age 13, to under age 17, 19, 24 or 26, depending upon the provision).
• Retirement and semi-retirement is also a major event for tax purposes for which first-year “required minimum distributions” from retirement savings must be calculated and made. Also an important year-end consideration for the newly retired is facing what is typically an entirely new matrix of investment income considerations focused on “smoothing” the amount of income and deductions among several years to achieve maximum tax results.
• Timing the recognition of capital gains and losses is important, in particular to maximize offsetting short-term gains (that are tax at ordinary income rates) with short-term losses. Also especially relevant to 2012 year-end timing of capital gains and losses is the introduction of a 3.8 percent Medicare contributions tax that will be assessed on excess net investment income starting in 2013.
• Projecting available itemized deductions for 2012, then controlling whether a better tax result might take place by deferring or accelerating some of those deductions, is frequently important. Some taxpayers who are close to the amount of their standard deduction amount may want to load deductions into a single year, say 2013, so they have enough to itemize deductions for that year, while still be entitled to the maximum amount of their standard deduction into an adjacent year (2012 in our example). Other taxpayers need to be aware of alternative minimum tax (AMT) exposure in which many deductions become cut back or eliminated.
• Unusual expenses that may generate an atypical deduction or credit, such as emergency medical expenses, moving expenses, or unemployment and job-search expenses, may need special attention. In connection with medical expenses, and particularly relevant to 2012 year-end planning, is the increase in the floor on deductible medical expenses from 7.5 percent adjusted gross income (AGI) in 2012 to 10 percent AGI in 2013 (7.5 percent for those who reach 65 years of age by the close of the tax year).
• Gift giving, both charitable and for estate planning purposes, usually reaches a high point at year end and for good reason. In addition to better knowing what assets remain available for gifting (or what income needs offsetting with a charitable deduction), certain tax benefits cannot be accumulated but must be used or lost each year. For example, the $13,000 annual gift tax exclusion per recipient cannot be carried over and used in addition to the $14,000 gift tax exclusion that will be available in 2013. A gift of $13,000 on December 31, 2012 and a $14,000 gift on January 1, 2013, for example, amount to a $27,000 tax-free gift; while a $27,000 gift all on January 1, 2013 will subject $13,000 of that gift to potential gift tax. A charitable gift can frequently require the same timing finesse, for example, if donors find themselves in a higher tax bracket in a particular year or not being able to otherwise itemize deductions.

Traditional Planning for Businesses

Businesses also face some traditional strategic decisions that often can only be made at year-end:

• Capital purchases that qualify for accelerated depreciation, bonus depreciation or so-called Section 179 expensing should be timed to fall into the current or the upcoming year, as the overall profit and loss of a business dictates. “Placed in service” requirements in addition to timing the purchase of equipment also apply to maximizing tax benefits.
• Determination of whether a business is on the cash or accrual method of accounting for tax purposes is also critical to year-end business strategies. Businesses using the cash basis method of accounting recognize and report income when the business actually or constructively receives cash or its equivalent; for accrual-basis taxpayers, generally the right to receive income, rather than actual receipt, determines the year of inclusion of income.
• Compensation and shareholder or partner distributions from a business, and drawing the often fine line between the two, can make a considerable difference to a business owner’s overall tax liability for the year. Differences often hinge upon whether self-employment tax is paid, or whether a distribution is taxed as ordinary income or at the capital gains rate.
• Determining the difference between ordinary business activities and passive activities before implementing a year-end strategy also just makes good sense. Rental income or losses, and other passive activity gains and losses, must be netted separately from business gains and losses. Year-end timing for one does not necessarily help control your bottom-line tax cost on the other.

Please contact us if you have any questions about how traditional year-end planning might benefit your bottom line. Once Congress acts on year-end tax legislation this year, we also suggest that most taxpayers consider what steps may then be taken before the 2012 tax year closes to mitigate against any unfavorable new tax provisions.

The tax code provides for 50 percent first-year bonus depreciation for 2012. If property qualifies for bonus depreciation, the taxpayer can deduct 50 percent of the cost of the property in 2012. This can help a business bear the cost of investing in needed equipment, as well as facilitate cash flow and provide operating funds for the business. It is not too late to qualify for 50-percent bonus depreciation for 2012.

The tax code provides for 50 percent first-year bonus depreciation for 2012. If property qualifies for bonus depreciation, the taxpayer can deduct 50 percent of the cost of the property in 2012. This can help a business bear the cost of investing in needed equipment, as well as facilitate cash flow and provide operating funds for the business. It is not too late to qualify for 50-percent bonus depreciation for 2012.

In 2011, bonus depreciation was 100 percent. There have been proposals to reinstate 100 percent bonus depreciation for 2012, but they have not been acted on. For 2012, 50 percent bonus depreciation is available. It expires at the end of 2012 and is not available for 2013. (Note that certain longer production-period property and transportation property still qualifies for 100 percent bonus depreciation if it is acquired and placed in service during 2012.)

Qualified property must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less. Qualified property also includes computer software, water utility property, and qualified leasehold improvement property. The property generally has to be depreciable under MACRS; thus, intangible assets amortized over 15 years do not qualify for bonus depreciation.

There are other requirements for taking 50-percent bonus depreciation in 2012. The original use of the property must begin with the taxpayer. The property must be new, must be acquired before January 1, 2013 (title must pass), and must be placed in service before January 1, 2013. Being placed in service requires that the property be installed and ready for use in the business. The property must be in a condition or state of readiness to be used on a regular, ongoing basis. The property must be available for a specifically assigned function in the trade or business.

The original use is the first use to which the property is put. That, if a taxpayer purchases used property from another business, the property will not qualify for bonus depreciation. However, if the taxpayer makes additional expenditures to recondition or rebuild acquired property, these expenses can satisfy the original use requirement. A person who acquires new property for personal use and then converts it to business use is still considered the original user of the property.

The acquisition date rules require that there not be a written binding contract in effort before January 1, 2008 to acquire the property. Property can qualify if the taxpayer entered into a written binding contract for its acquisition after December 31, 2007 and before January 1, 2013. Self-manufactured property can qualify if the taxpayer begins manufacturing, constructing or producing the property before January 1, 2013. Property is deemed acquired when reduced to physical possession or control. Regardless of the manner of acquisition, the property must be placed in service before January 1, 2013.

If the business does not have profits in the current year, it can use the bonus depreciation deduction to create a net operating loss, which can then be carried back (or forward) to a profitable year and generate a refund. However, bonus depreciation is not mandatory. Taxpayers may choose to elect out of bonus depreciation, so that they can spread depreciation deductions more evenly over future years.

If you need further assistance in arranging any capital purchases for your business to qualify for bonus depreciation before it sunsets at the end of 2012, please contact this office.

Although it is generally not considered prudent to withdraw funds from a retirement savings account until retirement, sometimes it may appear that life leaves no other option. However, borrowing from certain qualified retirement savings account rather than taking an outright distribution might prove the best solution to getting you through a difficult period. If borrowing from a 401(k) plan or other retirement savings plan becomes necessary, for example to pay emergency medical expenses or for a replacement vehicle essential to getting to work, you should be aware that there is a right way and a number of wrong ways to go about it.

Although it is generally not considered prudent to withdraw funds from a retirement savings account until retirement, sometimes it may appear that life leaves no other option. However, borrowing from certain qualified retirement savings account rather than taking an outright distribution might prove the best solution to getting you through a difficult period. If borrowing from a 401(k) plan or other retirement savings plan becomes necessary, for example to pay emergency medical expenses or for a replacement vehicle essential to getting to work, you should be aware that there is a right way and a number of wrong ways to go about it.

When a plan loan is not a taxable distribution

In general, a loan from a qualified employer plan, such as a 401(a) or 401(k) account, must be treated as a taxable distribution unless you can meet certain requirements with respect to amount, repayment period, and repayment method.

First, however, the terms of the employer-plan must allow for plan loans. Due to administrative costs and other considerations, plan loans are made optional for employer plans. If permitted, however, loans must be made available to all employees.

A loan to a participant or beneficiary is generally not treated as a taxable distribution if:

• The loan is evidenced by a legally enforceable written agreement that specifies the amount and term of the loan and the repayment schedule;
• The amount of the loan does not exceed $50,000 or half of the participant's vested accrued benefit under the plan (whichever is less);
• The loan, by its terms, requires repayment within five years, except for certain home loans; and
• The loan is amortized in level installments over the term of the loan.

Plan loans may be made only from employer-based plans. Individual retirement accounts (IRAs) cannot be used as collateral for a loan, nor can a direct loan be made from the IRA to the account holder.

Calculating the amount of the plan loan

In addition to the $50,000 or 50 percent vested benefit rule, several other provisions apply to the amount of the plan loan. First, a plan participant may take out a loan of up to $10,000, even if that $10,000 is more than one-half of the present value of his vested accrued benefit. Second, if a plan participant decides to take out another plan loan, the new maximum amount of the total plan loans will be determined by the following method:

($50,000 − (highest outstanding loan balance during the preceding 12-month period − outstanding balance on the date of the new loan)) = new plan loan maximum.

That new plan maximum must be reduced further by any outstanding loan balance.

Repayment period

Participants must repay a loan within five years. There is one exception, however, for a loan used to make a purchase of a first-time home that is a principal residence. The loan term may then be as long as 30 years.

If a participant defaults on a loan payment, the entire principal may become due under the terms of the plan. In addition, most plan terms require that you repay the loan within 60 days if you leave or lose your job. If you cannot repay at that time, the balance of the loan is usually considered a taxable distribution deducted from your remaining retirement plan account balance. That deemed distribution may also incur a 10 percent early distribution penalty.

Repayment method

Loan repayments must be made at least every quarter, and are generally deducted automatically from a participant’s paycheck. Defaulting on a loan causes the IRS to treat the entire outstanding loan balance as a premature (and therefore a taxable) distribution from the employer plan. A deemed distribution occurs at the time of the failure to pay an installment, but the plan administrator can allow a grace period. The deemed distribution then becomes subject to both income tax and the 10 percent early withdrawal penalty.

There are benefits to borrowing from an employer retirement plan, such as providing a ready-made source of credit and the benefit of returning interest paid back into the plan account rather than into the pockets of a third-party lender. There are also many drawbacks to taking out a plan loan. To learn more, please contact our offices.

Deductible investment expenses fall into three basic categories:

Deductible investment expenses fall into three basic categories:

(1)  Expenses that are directly deductible against particular items of income, without reduction;
(2)  Expenses of producing income that are taken as miscellaneous itemized deductions; and
(3)  Investment interest expense.

The first category applies to rent and royalty income. Expenses attributable to rents and royalties may be deducted in full from gross income in computing adjusted gross income. The expenses are allowed whether or not the taxpayer itemizes deductions. Rental and royalty income and deductions are reported on Schedule E, Supplemental Income and Loss. The totals are then carried over to Form 1040, line 17 (note: references to particular line numbers in this article are to the 2011 Form 1040 since the IRS is not expected to release 2012 Form 1040 until late December, after Congress acts on 2012 legislation).

This first category also applies to direct costs from purchasing and selling stock (e.g. sales commissions) that are included in cost basis or deducted from amounts realized.

The second category applies to a host of expenses that may be related to investments and financial activities but do not necessarily relate to a particular investment. These expenses can be deducted as ordinary and necessary expenses incurred either for the production of income, or for the management, conservation, or maintenance of property held for the production of income. Examples include expenses for investment counsel, investment advice and management, custodial fees, office rent, clerical help, travel to broker’s offices and investment sites, bank fees and safe deposit box rentals, fees for IRAs, and subscriptions to investment-related publications.

This second category is included in miscellaneous itemized deductions on line 23 (other expenses) of Form 1040, Schedule A, Itemized Deductions (2011 form). Miscellaneous itemized deductions, together with unreimbursed job expenses and tax preparation fees, are only deductible to the extent their total exceeds two percent of adjusted gross income (line 38 of 2011 Form 1040). Most taxpayers will only choose to report their itemized deductions if they exceed the standard deduction, which for 2011 is $11,600, married filing jointly and qualified widow or widower; $8,500, head of household; and $5,800, single taxpayers or married filing jointly.

The third category is investment interest expense. Money borrowed to buy property that is held for investment is investment interest. The deduction is limited to net investment income, determined after deducting investment expenses, such as depreciation, that are directly connected with the production of the investment income. The deductible amount is calculated on Form 4952, Investment Interest Expense Deduction, and carried over to Line 14 (Interest You Paid) of Schedule A.

Taxpayers cannot deduct interest incurred to produce tax-exempt income. Investment interest does not include home mortgage interest or interest taken into account in computing income or loss from a passive activity.

As you can see, the deduction of investment expenses can be complex.  Timing these expenses to align themselves with more comprehensive strategies, such as at year end, can create additional issues.  If you have questions about the treatment of these expenses, please contact our office.

In recent years, the IRS has been cracking down on abuses of the tax deduction for donations to charity and contributions of used vehicles have been especially scrutinized. The charitable contribution rules, however, are far from being easy to understand. Many taxpayers genuinely are confused by the rules and unintentionally value their contributions to charity at amounts higher than appropriate.

In recent years, the IRS has been cracking down on abuses of the tax deduction for donations to charity and contributions of used vehicles have been especially scrutinized. The charitable contribution rules, however, are far from being easy to understand. Many taxpayers genuinely are confused by the rules and unintentionally value their contributions to charity at amounts higher than appropriate.

Vehicle donations

According to the U.S. Department of Transportation (DOT), there are approximately 250 million registered passenger motor vehicles in the United States. The U.S. is the largest passenger vehicle market in the world.  Potentially, each one of these vehicles could be a charitable donation and that is why the IRS takes such a sharp look at contributions of used vehicles and claims for tax deductions. The possibility for abuse of the charitable contribution rules is large.

Bona fide charities

Before looking at the tax rules, there is an important starting point.  To claim a tax deduction, your contribution must be to a bona fide charitable organization. Only certain categories of exempt organizations are eligible to receive tax-deductible charitable contributions. 

Many charitable organizations are so-called “501(c)(3)” organizations (named after the section of the Tax Code that governs charities. The IRS maintains a list of qualified Code Sec. 501(c)(3) organizations. Not all charitable organizations are Code Sec. 501(c)(3)s. Churches, synagogues, temples, and mosques, for example, are not required to file for Code Sec. 501(c)(3) status. Special rules also apply to fraternal organizations, volunteer fire departments and veterans organizations. If you have any questions about a charitable organization, please contact our office.

Tax rules

In past years, many taxpayers would value the amount of their used vehicle donation based on information in a buyer’s guide. Today, the value of your used vehicle donation depends on what the charitable organization does with the vehicle.

In many cases, the charitable organization will sell your used vehicle. If the charity sells the vehicle, your tax deduction is limited to the gross proceeds that the charity receives from the sale. The charitable organization must certify that the vehicle was sold in an arm’s length transaction between unrelated parties and identify the date the vehicle was sold by the charity and the amount of the gross proceeds. 

There are exceptions to the rule that your tax deduction is limited to the gross proceeds that the charity receives from the sale of your used vehicle. You may be able to deduct the vehicle’s fair market value if the charity intends to make a significant intervening use of the vehicle, a material improvement to the vehicle, or give or sell the vehicle to a qualified needy individual. If you have any questions about what a charity intends to do with your vehicle, please contact our office.

Written acknowledgment

The charitable organization must give you a written acknowledgment of your used vehicle donation. The rules differ depending on the amount of your donation.  If you claim a deduction of more than $500 but not more than $5,000 for your vehicle donation, the written acknowledgment from the charity must:

• Identify the charity’s name, the date and location of the donation
• Describe the vehicle
• Include a statement as to whether the charity provided any goods or services in return for the car other than intangible religious benefits and, if so, a description and good faith estimate of the value of the goods and services
• Identify your name and taxpayer identification number
• Provide the vehicle identification number

The written acknowledgement generally must be provided to you within 30 days of the sale of the vehicle.  Alternatively, the charitable organization may in certain cases, provide you a completed Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, that contains the same information.

The written acknowledgment requirements for claiming a deduction under $500 or over $5,000 are similar to the ones described above but there are some differences. For example, if your deduction is expected to be more than $5,000 and not limited to the gross proceeds from the sale of your used vehicle, you must obtain a written appraisal of the vehicle. Our office can help guide you through the many steps of donating a vehicle valued at more than $5,000.

If you are planning to donate a used vehicle, please contact our office and we can discuss the tax rules in more detail.

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 November 2012.

November 2012 tax compliance calendar

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 November 2012.

November 7
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 31–November 2.

November 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 3–6.

November 13
Employees who work for tips. Employees who received $20 or more in tips during October must report them to their employer using Form 4070.

November 15
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 7–9.

November 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 10–13.

November 21
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 14–16.

November 26
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 17–20.

November 28
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 21–23.

November 30
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 24–26.

December 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 28–30.

Hopes for a pre-election resolution to the fate of the Bush-era tax cuts, extenders and other tax incentives are quickly fading as summer approaches.  This year is increasingly looking like a replay of 2010, the last time the Bush-era tax cuts were facing imminent expiration.  The White House, the Democratic-controlled Senate and the GOP-controlled House all have different opinions on the fate of these tax incentives and negotiations, which have been few and far between, and have quickly bogged down.  One solution, which is being talked about more and more, is a temporary extension of the tax cuts.  While this would punt the issue to the next Congress, it does little to ease taxpayers’ concerns about tax planning in a climate of constant uncertainty.

Hopes for a pre-election resolution to the fate of the Bush-era tax cuts, extenders and other tax incentives are quickly fading as summer approaches.  This year is increasingly looking like a replay of 2010, the last time the Bush-era tax cuts were facing imminent expiration.  The White House, the Democratic-controlled Senate and the GOP-controlled House all have different opinions on the fate of these tax incentives and negotiations, which have been few and far between, and have quickly bogged down.  One solution, which is being talked about more and more, is a temporary extension of the tax cuts.  While this would punt the issue to the next Congress, it does little to ease taxpayers’ concerns about tax planning in a climate of constant uncertainty.

Bush-era tax cuts

Unless extended, the tax cuts in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) (as extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010) will sunset after December 31, 2012.  The list of expiring tax incentives is long and includes reduced individual income tax rates and capital gains/dividends tax rates; the $1,000 child tax credit; enhancements to the earned income tax credit (EIC); and much more.

On May 15, House Speaker John Boehner, R-Ohio, said that the House will vote before the November elections on legislation to extend the Bush-era tax cuts.  Boehner gave no timetable for a vote.  It is unclear at this time if the GOP plans to vote on making the Bush-era tax cuts permanent or merely to extend them one or two more years. Also unclear is whether or not any extension would be offset with revenue raisers elsewhere.  Even if the House votes on the tax cuts, there is no guarantee the Senate will take them up.

Complicating matters is the federal budget deficit.  After months of partisan wrangling last year, Congress passed the Budget Control Act of 2011 (BCA).  The BCA imposes mandatory, across-the-board spending cuts through sequestration.  The BCA’s spending cuts are scheduled to take effect in 2013.  The GOP wants to repeal the BCA and on May 10, the House approved legislation to effectively do that.  The GOP bill has no chance of passage in the Democratic-controlled Senate.  So the BCA remains, for now, law.

Few Capitol Hill observers expect Congress to take any meaningful action on the Bush-era tax cuts before the November elections. This leaves the fate of the Bush-era tax cuts to the lame duck Congress.  Depending on the outcome of the November elections, the lame duck Congress could do nothing and allow the Bush-era tax cuts to expire, make the tax cuts permanent, or – and this appears to be the most likely scenario – extend the tax cuts for one year. Either way, the uncertainty complicates tax planning for 2012 and beyond.

Small businesses

Lawmakers are also dueling over competing small business tax bills. The House has approved the GOP-sponsored Small Business Tax Cut Act.  The GOP bill would, among other provisions, provide a deduction for 20 percent of qualified domestic business income of the taxpayer for the tax year, subject to limitations. In the Senate, the Democrats’ small business bill would give a 10 percent income tax credit to small employers that increase wages or create jobs in 2012 and extend 100 percent bonus depreciation through 2012 (which had expired at the end of 2011).   If the Senate approves the Democratic bill, the two chambers could iron-out the differences in the bills in conference.

Tax extenders

Since January, supporters of the tax extenders have tried several times, all unsuccessfully, to attach the extenders to other bills.  Some of the extenders were initially attached to the Middle Class Tax Relief and Job Creation Act of 2012, which extended the employee-side payroll tax cut for all of calendar year 2012, but were subsequently dropped. Supporters also tried to include many of the extenders, especially energy-related tax incentives, to the Senate’s highway funding bill: the Moving Ahead for Progress in the 21st Century (MAP-21) Act.  At the last minute, the extenders were removed from the Senate bill.

A drag on the extenders is their estimated cost to the federal budget.  According to the Congressional Research Service, renewing all of the extenders for 2012 would cost $35 billion. This is one reason why supporters have tried to move only some of the extenders.  There have also been calls in Congress to let some of the extenders expire permanently; but every extender has its supporter.

Federal estate tax

Another big question mark hovers over the federal estate tax.  Unless Congress acts, the federal estate tax is schedule to revert to its pre-EGTRRA levels (a top tax rate of 55 percent with a $1 million exclusion).  In 2010, the White House and the GOP agreed on a top tax rate of 35 percent with a $5 million exclusion (indexed for inflation) for decedents dying in 2011 and 2012 (special rules applied to decedents dying in 2010).  The GOP has proposed to eliminate the estate tax entirely or, if not abolished, to retain the 35/$5 million amounts for decedents dying after 2012; the White House has proposed to reduce the exclusion amount to $3.5 million. 

Our office will monitor developments and keep you posted of any changes. If you have any questions about legislative developments, please contact our office.

As businesses weather challenging economic times, one boost can come from depreciation.  The term “depreciation” is often associated with complicated accounting and tax transactions but the fundamental concept is fairly simple. Depreciation should not be overlooked as a valuable tool.

As businesses weather challenging economic times, one boost can come from depreciation.  The term “depreciation” is often associated with complicated accounting and tax transactions but the fundamental concept is fairly simple. Depreciation should not be overlooked as a valuable tool.

Basics

Depreciation is essentially an income tax deduction.  Depreciation allows you to recover the cost or other basis of qualified property. The rules for depreciation vary depending on the type of property.  In recent years, these rules have been made more complex by tax legislation for bonus depreciation and special treatment of certain property.  We’ll discuss bonus depreciation later.

Generally, tangible property is depreciable. Tangible property is depreciable if it is subject to wear and tear. Tangible property includes machinery and equipment, motor vehicles, and furniture.  Land, however, is not tangible property for depreciation purposes.  Intangible property also may qualify for depreciation.  One of the most widely used types of intangible property in every business activity is computer software.  Copyrights and patents, which are intangible property, are also depreciable.  Many types of property are not depreciable (although there are always exceptions). One type of business property that is not depreciable is inventory.

Use

To be depreciable, the property, whether tangible or intangible, must be used for business or in other income-producing activities. It is not the nature of the property itself which is determinative but rather the purpose for which the property is held. If you use property for business and for personal purposes, you can only deduct depreciation based only on the business use of that property.

Depreciation begins when a taxpayer places property in service for use in a trade or business or for the production of income. The property must have a determinable useful life of more than one year. Property that is placed in service and disposed of in the same year cannot be depreciated. Property ceases to be depreciable when you have fully recovered the property’s cost or other basis or when you retire it from service, whichever happens first.

Let’s look at an example: Olivia owns a small candy company.  Olivia purchases a new candy-making machine. The machine is delivered in November 2012. However, the machine is not installed and operational until February 2013. If the machine had been ready and available for use when it was delivered, it would be considered placed in service in 2012 even if it was not actually used until 2013.

Methods

Generally, the method for calculating depreciation is determined by the type of property and when the property was placed in service. For tangible property, there are currently three systems of depreciation in effect, depending on when the property was placed in service. They are the modified accelerated cost recovery system (MACRS) for property placed in service after 1986, the accelerated cost recovery system (ACRS) for property placed in service after 1980 but before 1987, and the pre-1981 system (which included the straight-line method, declining-balance method, and certain other methods based on useful life and salvage value) for property placed in service before 1981.

Bonus depreciation

Bonus depreciation is intended to encourage businesses to make capital investments by enabling them to write these investments off more quickly. Under current law, 50 percent bonus depreciation is available for qualified property acquired after December 31, 2007 and placed in service before January 1, 2013 (before January 1, 2014 in the case of certain property with a long production period and certain noncommercial aircraft).  A 100 percent bonus depreciation rate applies to property acquired after September 8, 2010 and placed in service before January 1, 2012 (before January 1, 2013 for certain property with a long production period and certain noncommercial aircraft).  Several bills are pending in Congress to extend 100 percent depreciation through 2012.

Let’s look at an example:  ABC Co., a calendar-year taxpayer, acquires and places in service business equipment that costs $1 million on June 1, 2012. Under current law, ABC may claim an additional first-year depreciation deduction of 50 percent of the basis of the property, or $500,000. The remaining $500,000 of adjusted basis is recovered under the depreciation provisions other than the additional allowance.

Other considerations

While the basic concept of depreciation itself may be simple, strategies in its implementation to minimize tax liability sometimes may not be so straightforward.  Decisions over whether to classify a particular asset within one or another depreciation “class,” whether certain components of a building can be depreciated faster than the building itself, whether something is an improvement that requires depreciation or a repair that may be deducted immediately in full, and whether early disposition of a particular asset raised the pitfall of depreciation recapture are some of the many “fine points” surrounding depreciation that can make a significant difference in a business’ taxable income.

If you have any questions about depreciation, please contact our office.

IRS Commissioner Douglas Shulman unveiled his “real-time” tax system idea late in 2011. Since then, the IRS has had public meetings with stakeholders, including representatives of taxpayers, government officials, tax professional associations, and many others, to discuss moving the IRS away from its traditional “look-back” system to a “real-time” system. As explained by Shulman, the goal of a real-time system is to resolve problems with a taxpayer’s return before it is processed rather than wait until after it is processed.

IRS Commissioner Douglas Shulman unveiled his “real-time” tax system idea late in 2011. Since then, the IRS has had public meetings with stakeholders, including representatives of taxpayers, government officials, tax professional associations, and many others, to discuss moving the IRS away from its traditional “look-back” system to a “real-time” system. As explained by Shulman, the goal of a real-time system is to resolve problems with a taxpayer’s return before it is processed rather than wait until after it is processed.

Real-time system

Today, many routine transactions, especially financial transactions, are done in “real-time.”  Consumers can access their bank and other financial accounts online 24/7.  Communicating and doing business with the IRS, however, is still very much slower.

Traditionally, the IRS has operated on a “look-back” system. That is, the IRS accepts returns, processes them and then contacts taxpayers about any problems on the returns. Frequently, it takes the IRS many months to contact a taxpayer about an issue with a return. A real-time tax system, as described by Shulman, would improve the return filing process by accelerating the IRS’s response time.

Under a real-time tax system, the IRS would match information submitted on a return with third-party information at the beginning of processing rather than after the return has been processed.  This “real-time” activity would give taxpayers the opportunity to correct their return before the IRS completes processing the return. Problems could be resolved much more quickly, Shulman has predicted.

Forms W-2

A real-time tax system could begin with changes to the processing of Form W-2, Wage and Tax Statement.  Requiring more electronic filing of Forms W-2 by employers could improve processing time, payroll industry representatives told the IRS in January 2012. However, a real-time tax system would likely require the IRS to accelerate the matching of Form W-2 data it receives from the Social Security Administration (SSA) and that could place an additional burden on the SSA.

Issues

Moving to a real-time tax system is not something that will happen overnight.  Proponents of a real-time tax system have recommended moving up the April 15 filing date. Under current law, the deadline for filing individual income tax returns is April 15 and only Congress can change that date.

The IRS would also have to adjust its return processes. The IRS currently resolves most mismatches of return information and third-party information post-filing. Resolving these issues before a return is processed would likely require more IRS personnel and would also impact many professional return preparers during their busiest time of the year: the filing season. 

The IRS is currently operating under very tight budget parameters. Congress reduced the IRS’s funding for fiscal year (FY) 2012 and additional cuts may be made in future IRS budgets. These budgetary pressures make moving to a real-time tax system unlikely at the present. Most recently, Shulman acknowledged that a real-time tax system is a “long-term destination” rather than a “short-term project.”

If you have any questions about the IRS’s real-time proposal, please contact our office.

A U.S. person with financial interests in or signature authority over foreign financial accounts generally must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) if, at any point during the calendar year, the aggregate value of the accounts exceeds $10,000. The FBAR form is due by June 30 of the calendar year following the calendar year being reported. Thus, FBARs for 2011 are due by June 30, 2012. An FBAR is not considered filed until it is received by the Treasury Department in Detroit, MI.

A U.S. person with financial interests in or signature authority over foreign financial accounts generally must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) if, at any point during the calendar year, the aggregate value of the accounts exceeds $10,000. The FBAR form is due by June 30 of the calendar year following the calendar year being reported. Thus, FBARs for 2011 are due by June 30, 2012. An FBAR is not considered filed until it is received by the Treasury Department in Detroit, MI.

Aggregate value.  To determine whether a U.S. person has interests in or authority over foreign accounts with an aggregate value of at least $10,000 during the year, the maximum values of all of the accounts are added together. An account's maximum value is a reasonable approximation of the greatest value of currency or nonmonetary assets in the account during the year.  Account value is determined in the currency of the account.

Signatures. An FBAR filed by an individual must be signed by the filer identified in Part I. The filer's title should be provided only if the FBAR reports signature authority over a foreign account. In that case, the title should be the one on which the individual's signature authority is based.
An FBAR filed by an entity must be signed by an authorized individual, whose title must also be provided. If spouses file only one FBAR to report their jointly owned accounts, they must both sign the FBAR.

Jointly owned accounts.  Generally, when one account has more than one owner, each owner that is required to file an FBAR must report the entire maximum value of the account. Each owner must also provide the number of other owners of each account. The FBAR should use the identifying information for the principal owner.  Simpler rules apply when joint owners are also spouses. If one spouse files an FBAR the other spouse is not required to file a separate FBAR if: (1) all of the nonfiling spouse's foreign financial accounts are jointly owned with the filing spouse; (2) the filing spouse reports all of those jointly-owned accounts on a timely filed FBAR; and (3) both spouses sign the FBAR.

Where to file.  The FBAR is not filed with the taxpayer’s federal income tax return. Instead, it is filed with the Treasury Department (although the IRS accepts hand deliveries for forwarding).

There are four methods for filing an FBAR. (1) Mail the FBAR to: Department of the Treasury, PO Box 32621, Detroit MI 48232-0621; (2) Send the FBAR via an express delivery service to: IRS Enterprise Computing Center, ATTN: CTR Operations Mailroom, 4th Floor
985 Michigan Ave., Detroit MI 48226; (3) Hand deliver the FBAR to any local IRS office (including IRS attaches located in U.S. embassies and consulates) for forwarding to the Treasury, Detroit MI; or (4) File the FBAR electronically. E-filers must first apply to become a BSA (Bank Secrecy Act) e-filer.

Record-keeping.  Persons who must file FBARs must also retain records that show: the name in which each account in maintained, the account number or other designation, the name and address of the foreign financial institution that maintains the account, the type of account, and each account's maximum account value during the reporting period.

These records must be kept for five years following the FBAR's due date. The records must also be available for inspection by the Treasury Department.

FATCA.  Keep in mind that you may also be required to file new IRS Form 8938, Statement of Specified Foreign Financial Accounts. The Foreign Account Tax Compliance Act (FATCA) of 2010 created separate and distinct reporting requirements for certain taxpayers holding specified foreign financial assets. New Form 8938, Statement of Specified Foreign Financial Assets, is similar to the FBAR but has some important differences.

The threshold for filing Form 8938 is higher than the FBAR (and the threshold varies depending on the taxpayer’s status and location). Form 8938 also applies – at this time – to only specified individuals and covers only specified foreign financial assets. Unlike the FBAR form, Form 8938 is filed together with your Form 1040 tax return if required.

Please call this office if you are not sure whether you must file an FBAR Form or you are unsure about what information to report.  While the Treasury has waived some penalties in the past when FBAR reporting was new, it has indicated that it will be less forgiving, if at all, for FBAR Forms required by the June 30, 2012 deadline.

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, reoccurring tax reporting and filing data for individuals, businesses and other taxpayers for the month of June 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, reoccurring tax reporting and filing data for individuals, businesses and other taxpayers for the month of June 2012.

June 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 26–29.

June 6
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 30–June 1.

June 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 2–5.

June 11
Employees who work for tips. Employees who received $20 or more in tips during May must report them to their employer using Form 4070.

June 13
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 6–8.

June 15
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 9–12.

June 20
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 13–15.

June 22
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 16–19.

June 27
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 20–22.

June 29
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 23–26.

July 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 27–29.

July9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 30–July 3.

The just-released 2011 IRS Data Book provides statistical information on IRS examinations, collections and other activities for the most recent fiscal year ended in 2011. The 2011 Data Book statistics, when compared to the 2010 version, shows, among other things, a notable increase in the odds of being audited within several high-income categories.

Individual audits

Individual taxpayers collectively were audited at a 1.1% rate over the FY 2011 period, based on 1,564,690 audited returns out of the 140,837,499 returns that were filed. While this rate is about the same as in 2010, variations occurred within the income ranges. An uptick was particularly noticeable in the upper brackets (see statistics, below).

Both correspondence and field audits were counted within the statistics. Correspondence audits accounted for 75% of all audits for FY 2011 (down from 77.1% in FY 2010), while audits conducted face-to-face by revenue agents were only 25% of the total, albeit representing an increase from the 21.7% level in FY 2010. Business returns and higher-income individuals are more likely to experience an audit by a revenue agent; while correspondence audits are generally single-issue audits, a revenue agent is likely to explore other issues "while he or she is there."

Examination coverage: individuals

The following audit statistics taken from the FY 2011 Data Book (and contrasted with FY 2010 Data Book stats) show an increase in the audit rate especially in proportion to adjusted gross income (AGI) level:

• No AGI: 3.42% (3.19% in 2010)
• Under $25K: 1.22% (1.18% in 2010)
• $25K-$50K: 0.73% (0.73% in 2010)
• $50K-$75K: 0.83% (0.78% in 2010)
• $75K-$100K: 0.82% (0.64% in 2010)
• $100K-$200K: 1.00% (0.71% in 2010)
• $200K-$500K: 2.66% (1.92% in 2010)
• $500K-$1M: 5.38% (3.37% in 2010)
• $1M-$5M: 11.80% (6.67% in 2010)
• $5M-$10M: 20.75% (11.55% in 2010)
• $10M and over: 29.93% (18.38% in 2010)

Examination coverage: business returns

For individual income tax returns that include business income (other than farm returns), the 2011 audit rate statistics based upon business income (total gross receipts) reveals the IRS's recognition that audits of small business returns yield proportionately higher deficiency amounts:

• Gross receipts under $25K: 1.3% (1.2% in 2010)
• Gross receipts $25K to $100K: 2.9% (2.5% in 2010)
• Gross receipts $100K to $200K: 4.3% (4.7% in 2010)
• Gross receipts over $200K: 3.8% (3.3% in 2010)

The difference in audit rates between returns with and without business income, as measured by total positive income of at least $200K and under $1M provide further evidence of the IRS's tendency toward auditing business returns: 3.6% for returns with business income versus 3.2% without in FY 2011 (2.9% versus 2.5% in FY 2010).

Corporate/other returns

The audit rates for corporations are consistent with the deficiency experience that the IRS has had examining corporations of varying sizes. Some selected audit rates include:

• For small corporations showing total assets of $250K to $1M, the audit rate for FY 2011 was 1.6% (1.4% in 2010); $1M to $5 million, the rate was 1.9% (1.7% in 2010), and for $5M to $10M, the rate was 2.6% (3% in 2010).
• For larger corporations showing total assets of $10M-$50M, the audit rate was 13.3% (13.4% in 2010) in contrast to those at the top end with total assets from $5B to $20B (50.5% (45.3% in 2010)).
• For S corporations and partnerships, the overall audit rate was 0.4% (same as in 2010), in contrast to an overall 1.5% rate for corporations (1.4% in 2010).

Building on earlier steps to help taxpayers buffeted by the economic slowdown, the IRS recently enhanced its "Fresh Start" initiative. The IRS has announced penalty relief for unemployed individuals who cannot pay their taxes on time and has increased the threshold amount for streamlined installment agreements.

Fresh Start

Many of the actions that economically-distressed taxpayers would like the IRS to take it cannot by law. The IRS cannot stop interest from accruing on unpaid taxes. The IRS also cannot move the filing deadline.

However, the IRS recognized that it can take some actions to help taxpayers who want to pay their taxes but cannot because of job loss or under-employment. In 2011, the IRS launched its Fresh Start initiative. The IRS made some taxpayer-friendly changes to its lien processes and also enhanced its streamlined installment agreement program for small businesses.

Installment agreements

An installment agreement allows taxpayers to pay taxes in smaller amounts over a period of time. Generally, individuals who owe less than $25,000 may qualify for a streamlined installment agreement. "Streamlined" means that taxpayers do not have to file extra information with the IRS, such as Collection Information Statement (Form 433-A or Form 433-F). The streamlined process is intended to be as simple as possible.

Effective immediately, the IRS has increased the threshold for entering into a streamlined installment agreement to $50,000. The maximum term for streamlined installment agreements has also been raised to 72 months from the current 60 month maximum. Taxpayers generally must pay an installment agreement fee and the IRS charges interest.

Before entering into an installment agreement, taxpayers should explore other options. It may be less expensive to pay your taxes on time with a credit card or a loan. Our office can help you weigh the advantages and disadvantages of an installment agreement.

Unemployed taxpayers

Taxes must be paid when due. This year, the deadline for filing individual returns is April 17, 2012. Taxpayers may request an automatic six-month extension but an extension does not provide additional time to pay.

Individuals who do not file by the deadline may be subject to a failure-to-file penalty. The IRS also may impose a failure-to-pay penalty if a taxpayer does not pay by the due date. The rules for the penalties are inter-related and are also complex.

Both the failure-to-file penalty and the failure-to-pay penalty may apply in any month. In these cases, the five percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Now, the IRS is granting a six-month grace period on failure-to-pay penalties to certain wage earners and self-employed individuals. The IRS explained that the request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by October 15, 2012.

Penalty relief is not available to all individuals. The IRS is limiting penalty relief to:

--Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.

--Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

Penalty relief is also subject to income limits. Your income must not exceed $200,000 if your filing status is married filing jointly or not exceed $100,000 if your filing status is single or head of household.

Additionally, the IRS has imposed a cap on the balance due. Penalty relief is restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

If you have any questions about the IRS Fresh Start initiative, please contact our office.

Everybody knows that tax deductions aren't allowed without proof in the form of documentation. What records are needed to "prove it" to the IRS vary depending upon the type of deduction that you may want to claim. Some documentation cannot be collected "after the fact," whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS. This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return. We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit.

Everybody knows that tax deductions aren’t allowed without proof in the form of documentation.  What records are needed to “prove it” to the IRS vary depending upon the type of deduction that you may want to claim.  Some documentation cannot be collected “after the fact,” whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS.  This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return.  We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit.

Charitable contributions.  For cash contributions (including checks and other monetary gifts), the donor must retain a bank record or a written acknowledgment from the charitable organization. A cash contribution of $250 or more must be substantiated with a contemporaneous written acknowledgment from the donee.  “Contemporaneous” for this purpose is defined as obtaining an acknowledgment before you file your return.  So save those letters from the charity, especially for your larger donations.

Tip records.  A taxpayer receiving tips must keep an accurate and contemporaneous record of the tip income.  Employees receiving tips must also report the correct amount to their employers.  The necessary record can be in the form of a diary, log or worksheet and should be made at or near the time the income is received.

Wagering losses.  Gamblers need to substantiate their losses. The IRS usually accepts a regularly maintained diary or similar record (such as summary records and loss schedules) as adequate substantiation, provided it is supplemented by verifiable documentation.  The diary should identify the gambling establishment and the date and type of wager, as well as amounts won and lost. Verifiable documentation can include wagering tickets, canceled checks, credit card records, and withdrawal slips from banks.

Vehicle mileage log.  A taxpayer can deduct a standard mileage rate for business, charitable or medical use of a vehicle.  If the car is also used for personal purposes, the taxpayer should keep a contemporaneous mileage log, especially for business use.  If the taxpayer wants to deduct actual expenses for business use of a car also used for personal purposes, the taxpayer has to allocate costs between the business and personal use, based on miles driven for each.

Material participation in business activity.  Taxpayers that materially participate in a business generally can deduct business losses against other income.  Otherwise, they can only deduct losses against passive income.  An individual’s participation in an activity may be established by any reasonable means.  Contemporaneous time reports, logs, or similar documents are not required but can be particularly helpful to document material participation.  To identify services performed and the hours spent on the services, records may be established using appointment books, calendars, or narrative summaries.

Hobby loss.  Taxpayers who do not engage conduct an activity with a sufficient profit motive may be considered to engage in a hobby and will not be able to deduct losses from the activity against other income.  Maintaining accurate books and records can itself be an indication of a profit motive.  Moreover, the time and activities devoted to a particular business can be essential to demonstrate that the business has a profit motive.  Contemporaneous records can be an important indicator.

Travel and entertainment.  Expenses for travel and entertainment are subject to strict substantiation requirements. Taxpayers should maintain records of the amount spent, the time and place of the activity, its business purpose, and the business relationship of the person being entertained. Contemporaneous records are particularly helpful.

Sometimes in a rush to file your income tax return, you may unintentionally overlook some income that had to be reported, or a deduction that you should or should not have taken.  Now what?  The solution is usually straightforward: you should file what is called an amended return.

Taxable income is measured on an annual basis so you cannot generally wait on correcting a mistake by “making up the difference” on the return that you file next year.  You need to make the correction(s) directly on a revised return for the same tax year.  Form 1040X, Amended U.S. Individual Income Tax Return, is used to amend any individual income tax return.  Income tax returns other than individual income tax returns or returns filed on Form 1120, U.S. Corporation Income Tax Return, or Form 1120-A, U.S. Corporation Short Form Income Tax Return, are amended by filing the same form originally used to file the return.  Partnerships may use Form 1065X.  Amended returns should clearly be marked as such.  Some return forms such as Form 1041, U.S. Income Tax Return for Estates and Trusts, contain a box to be checked if it is being filed as an amended return.  For returns other than income tax returns, Form 843, Claim for Refund and Request for Abatement, is used to claim a refund.

To amend a non-income tax return other than to claim a refund, the same form originally used to file the return generally should be used.  Estate tax returns cannot be amended after they are due.  However, supplemental information may be filed that can change the amount of estate tax due from the amount shown on the return.

When to file an amended return.  A taxpayer must file an amended return and pay the additional tax due if the taxpayer omitted an item of income or incorrectly claimed a deduction for a tax year for which the limitation period is still open.  A tax year ordinarily remains open for three years from the filing of a return.  The three-year period starts running the day after the return is filed.  A return that is filed early is treated as filed on the due date of the return.  The limitations period on assessment for which a return remains open does not start over if an amended return is filed. 

If you realize that you made a mistake on your return that is not in IRS’s favor, it is best to correct it through filing an amended return as soon as possible.  If the IRS starts to audit you and finds the mistake first before you file your amended return, it can assess penalties on the original amount and treat you as if you had not come forward voluntarily on your own.

Special disaster loss option.  Not all amended returns are filed to correct a mistake.  One in particular –claiming a disaster loss—may be filed to effectively accelerate a casualty-loss deduction.  A taxpayer may elect to deduct a disaster loss in the year of occurrence or the immediately preceding year.  To qualify for the election, the loss must occur in a federally-declared disaster area.  The election is made on a return (if you have not filed your return yet for the preceding tax year), an amended return or a refund claim.  The amount of the deduction is determined using the casualty loss limitations.

A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner.  A single-member LLC ("SMLLC"), for example, is considered to be a disregarded entity. For federal and state tax purposes, the sole member of an SMLLC disregards the separate legal status of the SMLLC otherwise in force under state law.

A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner.  A single-member LLC ("SMLLC"), for example, is considered to be a disregarded entity. For federal and state tax purposes, the sole member of an SMLLC disregards the separate legal status of the SMLLC otherwise in force under state law.

As the result of being “disregarded,” the SMLLC does not file a separate tax return.  Rather, its income and loss is reported on the tax return filed by the single member.

• If the sole owner is an individual, the SMLLC's income and loss is reported on his or her Form 1040, U.S. Individual Income Tax Return. This method is similar to a sole proprietorship.
• If the owner is a corporation, the SMLLC's income or loss is reported on the corporation's Form 1120, U.S. Corporation Income Tax Return (or on Form 1120S in the case of an S Corporation). This treatment is similar to that applied to a corporate branch or division.

An SMLLC is not the only entity treated as a disregarded entity. Two corporate forms are also disregarded: a qualified subchapter S subsidiary and a qualified REIT subsidiary. However, SMLLCs are by far the most common disregarded entity currently in use.

For federal tax purposes, the SMLLC does not exist. All its assets and liabilities are treated as owned by the acquiring corporation.

Even though a disregarded entity’s tax status is transparent for federal tax purposes, it is not transparent for state law purposes. For example, an owner of an SMLLC is not personally liable for the debts and obligations of the entity. However, since the entity is disregarded, the owner is generally treated as the employer of disregarded entity employees for employment tax purposes.

For further details on disregarded entities or how this tax strategy may fit into your business operations, please contact our offices. 

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 April 2012.

 April 4

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 28–30.

 April 6

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 31–April 3.

 April 10

Employees who work for tips. Employees who received $20 or more in tips during March must report them to their employer using Form 4070.

 April 11

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 4–6.

 April 13

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 7–10.

 April 17

Individuals. Individuals file a 2011 income tax return (Form 1040 or Form 1040EZ) and pay any tax due (an automatic six-month extension to file (but not to pay) is available).

 Partnerships. File of 2011 calendar year return (Form 1065). Provide each partner with a Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1.

 April 19

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 11–13.

 April 20

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 14–17.

 April 25

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 18–20.

 April 27

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 21–24.

On February 22, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012.  The new law extends the employee-side payroll tax holiday, giving wage earners and self-employed individuals 12 months of reduced payroll taxes in 2012. 

2011 payroll tax holiday

Until 2011, the Old-Age, Survivors and Disability Insurance (OASDI) tax rate for employees was 6.2 percent (12.4 percent for self-employed individuals who pay both the employee-share and the employer-share).  These taxes help to fund Social Security.

In 2011, a payroll tax holiday took effect.  The payroll tax holiday reduced the employee-share of OASDI taxes by two percentage points from 6.2 percent to 4.2 percent for calendar year 2011 up to the Social Security wage base of $106,800.  The payroll tax holiday also gave a similar percentage reduction to self-employed individuals for calendar year 2011.

Two-month extension

The 2011 payroll tax holiday was originally enacted as a one-year tax break.  It was scheduled to expire after December 31, 2011.

In December 2011, Congress approved a two-month extension of the payroll tax holiday for January and February 2012.  The two-month extension provided for a 4.2 percent OASDI tax rate for individuals receiving wages and a comparable benefit for self-employed individuals through the end of February 2012.

Tough negotiations

In early 2012, lawmakers began negotiations over extending the two-month payroll tax holiday for the remainder of the year.  The 2011 payroll tax holiday had not been offset; that is, the lost revenue had not been made up elsewhere.  The two-month extension had been offset by higher fees on certain government-backed mortgages. Some lawmakers wanted any full-year extension of the payroll tax cut to be offset.

Several offsets were proposed and rejected, including a surtax on individuals with incomes over $1 million and repeal of certain business tax preferences.  In the end, lawmakers could not agree on any offsets and decided to extend the payroll tax holiday without paying for it.  They did agree to pay for extended unemployment benefits and the so-called Medicare “doc fix” with offsets.

The House passed the Middle Class Tax Relief and Job Creation Act of February 17 as did the Senate.  President Obama signed the bill on February 22.

2012 payroll tax holiday

The 2012 payroll tax holiday is essentially an extension of the 2011 payroll tax holiday. This means that wage earners pay OASDI taxes at a rate of 4.2 percent for calendar year 2012 up to the Social Security wage base ($110,100 for 2012). Self-employed individuals also benefit from a two-percentage point reduction in OASDI taxes for calendar year 2012.  The OASDI tax rate for employers, however, is not reduced and remains at 6.2 percent for calendar year 2012.

According to the White House, an “average” taxpayer should expect to see about $1,000 in savings in 2012.  An individual who makes at or above the Social Security wage base for 2012 ($110,100) will see a $2,202 benefit.

No recapture rule

In good news for some taxpayers, the Middle Class Tax Relief and Job Creation Act repeals a recapture rule Congress had imposed on the two-month extension.  The recapture rule was intended to prevent higher income individuals from enjoying too great a benefit from the payroll tax cut if it was not extended for all of 2012.  Because the payroll tax cut has been extended through the end of 2012, the recapture rule is expressly removed in the new law.

Employers and payroll processors

Because the 2012 payroll tax cut holiday is essentially an extension of the 2011 payroll tax cut holiday, employers and payroll processors should expect few glitches. The IRS has reported it anticipates no problems in administering the extension through the end of 2012. It has already issued a revised 2012 Form 941, Employer’s Quarterly Federal Tax Return, for use by employers to cover their revised reporting responsibilities. 

If you have any questions about the 2012 payroll tax holiday, please contact our office.

Retired employees often start taking benefits by age 65 and, under the minimum distribution rules, must begin taking distributions from their retirement plans when they reach age 70 ½. According to Treasury, a 65-year old female has an even chance of living past age 86, while a 65-year old male has an even chance of living past age 84. The government has become concerned that taxpayers who normally retire at age 65 or even age 70 will outlive their retirement benefits.

The government has found that most employees want at least a partial lump sum payment at retirement, so that some cash is currently available for living expenses. However, under current rules, most employer plans do not offer a partial lump sum coupled with a partial annuity. Employees often are faced with an “all or nothing” decision, where they would have to take their entire retirement benefit either as a lump sum payment when they retire, or as an annuity that does not make available any immediate lump-sum cash cushion. For retirees who live longer, it becomes difficult to stretch their lump sum benefits.

Longevity solution

To address this dilemma, the government is proposing new retirement plan rules to allow plans to make available a partial lump sum payment while allowing participants to take an annuity with the other portion of their benefits. Furthermore, to address the problem of employees outliving their benefits, the government would also encourage plans to offer “longevity” annuities. These annuities would not begin paying benefits until ages 80 or 85. They would provide you a larger annual payment for the same funds than would an annuity starting at age 70 ½. Of course, one reason for the better buy-in price is that you or your heirs would receive nothing if you die before the age 80 or 85 starting date. But many experts believe that it is worth the cost to have the security of knowing that this will help prevent you from “outliving your money.”

To streamline the calculation of partial annuities, the government would allow employees receiving lump-sum payouts from their 401(k) plans to transfer assets into the employer’s existing defined benefit (DB) plan and to purchase an annuity through the DB plan. This would give employees access to the DB plans low-cost annuity purchase rates.

According to the government, the required minimum distribution (RMD) rules are a deterrent to longevity annuities. Because of the minimum distribution rules, plan benefits that could otherwise be deferred until ages 80 or 85 have to start being distributed to a retired employee at age 70 ½. These rules can affect distributions from 401(k) plans, 403(b) tax-sheltered annuities, individual retirement accounts under Code Sec. 408, and eligible governmental deferred compensation plans under Code Sec. 457.

Tentative limitations

The IRS proposes to modify the RMD rules to allow a portion of a participant’s retirement account to be set aside to fund the purchase of a deferred annuity. Participants would be able to exclude the value of this qualified longevity annuity contract (QLAC) from the account balance used to calculate RMDs. Under this approach, up to 25 percent of the account balance could be excluded. The amount is limited to 25 percent to deter the use of longevity annuities as an estate planning device to pass on assets to descendants.

Coming soon

Many of these changes are in proposed regulations and would not take effect until the government issues final regulations. The changes would apply to distributions with annuity starting dates in plan years beginning after final regulations are published, which could be before the end of 2012. Our office will continue to monitor the progress of this important development.

A reduced corporate tax rate, elimination of many business tax preferences, a new minimum tax on overseas profits, and much more are all part of President Obama's recently released Framework for Business Tax Reform (the "Framework"). The much-anticipated blueprint of the administration's plans for corporate tax reform was unveiled on February 22, 2012, in Washington, D.C.

The Framework contains a large number of general business-oriented proposals which, according to the administration, will make the Tax Code less complicated for businesses and increase the nation's competitiveness in the global economy. A reduction in the corporate tax rate would be fully paid for by repeal of business tax preferences. The Framework also calls for a new minimum tax on overseas profits and encourages companies to return work to the U.S. by offering a new relocation tax incentive.

Congressional reaction to the administration's Framework was mixed. Democrats in Congress generally applauded the Framework for laying out a plan to reduce the corporate tax rate, a proposal that enjoys bipartisan support in Congress. Republicans were less enthusiastic, but some GOP lawmakers said that the Framework could serve as a starting point for comprehensive tax reform. While the November elections certainly play a part in the release of the current proposals, major tax reform now is considered inevitable by most observers. The question remains, however, as to how it will develop over the coming months.

Five-part framework

The President's overall proposal, which currently is framed only in general terms, is grounded in five elements:

--Eliminating tax expenditures and subsidies, broadening the corporate tax base, and cutting the corporate tax rate from 35 percent to 28 percent;

--Strengthening U.S. manufacturing and innovation by effectively lowering the rate for manufacturers to 25 percent (through an enhanced manufacturing credit), making the research tax credit permanent, and providing a number of clean-energy incentives;

--Fixing the international tax system that includes imposing a minimum tax on overseas profits, creating a 20 percent tax credit for moving operations back to the U.S., denying deductions for moving operations overseas, limiting the transfer of patents and other intellectual property to offshore subsidiaries, and delaying deductions for interest paid for overseas investments;

--Simplifying and cutting taxes for small businesses (not just for corporations) through a number of reforms, including a 100 percent expensing up to $1 million; cash accounting for businesses with gross receipts up to $5 million; enhanced deductions for startup expenses, and an enhanced Code Section 45R small employer health insurance tax credit; and

--Restoring fiscal responsibility and not add to the deficit through making reform revenue neutral, including a need to do so for whatever portion of the $250 billion in reoccurring extender tax benefits that Congress deems necessary to continue.

Individual tax reform

In unveiling this framework for business tax reform, Treasury Secretary Timothy Geithner stated that individual tax reform does not necessarily need to be considered at the same time as business tax reform.  With individual tax reform clearly the most politically volatile component to total tax reform, most Washington observers believe that tax reform will follow a sequential route, with business tax reform going first.

The number of tax return-related identity theft incidents has almost doubled in the past three years to well over half a million reported during 2011, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Identity theft in the context of tax administration generally involves the fraudulent use of someone else’s identity in order to claim a tax refund. In other cases an identity thief might steal a person’s information to obtain a job, and the thief’s employer may report income to the IRS using the legitimate taxpayer’s Social Security Number, thus making it appear that the taxpayer did not report all of his or her income.

In light of these dangers, the IRS has taken numerous steps to combat identity theft and protect taxpayers. There are also measures that you can take to safeguard yourself against identity theft in the future and assist the IRS in the process.  

IRS does not solicit financial information via email or social media

The IRS will never request a taxpayer’s personal or financial information by email or social media such as Facebook or Twitter. Likewise, the IRS will not alert taxpayers to an audit or tax refund by email or any other form of electronic communication, such as text messages and social media channels.

If you receive a scam email claiming to be from the IRS, forward it to the IRS at phishing@irs.gov. If you discover a website that claims to be the IRS but does not begin with 'www.irs.gov', forward that link to the IRS at phishing@irs.gov.

How identity thieves operate

Identity theft scams are not limited to users of email and social media tools. Scammers may also use a phone or fax to reach their victims to solicit personal information. Other means include:

-Stealing your wallet or purse
-Looking through your trash
-Accessing information you provide to an unsecured Internet site.

How do I know if I am a victim?

Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice. If you believe the notice is not from the IRS, contact the IRS to determine if the letter is a legitimate IRS notice.

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification, such as a Social Security card, driver's license or passport, along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 1-978-684-4542.

What should I do if someone has stolen my identity?

If you discover that someone has filed a tax return using your SSN you should contact the IRS to show the income is not yours. After the IRS authenticates who you are, your tax record will be updated to reflect only your information. The IRS will use this information to minimize future occurrences.

What other precautions can I take?

There are many things you can do to protect your identity. One is to be careful while distributing your personal information. You should show employers your Social Security card to your employer at the start of a job, but otherwise do not routinely carry your card or other documents that display your SSN.

Only use secure websites while making online financial transactions, including online shopping. Generally a secure website will have an icon, such as a lock, located in the lower right-hand corner of your web browser or the address bar of the website with read “https://…” rather than simply “http://.”

Never open suspicious attachments or links, even just to see what they say. Never respond to emails from unknown senders. Install anti-virus software, keep it updated, and run it regularly.

For taxpayers planning to e-file their tax returns, the IRS recommends use of a strong password. Afterwards, save the file to a CD or flash drive and keep it in a secure location. Then delete the personal return information from the computer hard drive.

Finally, if working with an accountant, query him or her on what measures they take to protect your information.

The Patient Protection and Affordable Care Act (PPACA) introduced many new requirements for individuals and employers. One of the new requirements is an employer shared responsibility assessable payment.  At this time, there is little guidance for employers other than the language of the PPACA and some requests for comments from government agencies. The IRS, the U.S. Department of Labor (DOL) and the Department of Health and Human Services (HHS) are developing guidance for employers.

Shared responsibility payment

The PPACA imposes a shared responsibility assessable payment on certain large employers (Code Sec. 4980H). The provisions about shared responsibility for large employers are among the most complex in the PPACA.

Generally, a large employer will be subject to an assessable payment if any full-time employee is certified to receive a premium assistance tax credit and either the employer does not offer full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an employer plan (Code Sec. 4980H(a)) or the employer offers full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage that either is unaffordable or does not provide minimum value (Code Sec. 4980H(b)).   The shared responsibility payment requirement is scheduled to be effective after 2013.

The PPACA describes how to calculate the shared responsibility payment.  The annual assessable payment under Code Sec. 4980H(a) is based on all (excluding the first 30) full-time employees. The annual assessable payment under Code Sec. 4980H(b) is based on the number of full-time employees who are certified to receive an advance payment of an applicable premium tax credit.

The shared responsibility payment requirement applies to “large” employers.  The PPACA describes a large employer as generally an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year.  The PPACA includes special rules for employers that employ seasonal workers.  The PPACA exempts small firms that have fewer than 50 full-time employees.

More guidance expected

In 2011, the IRS, DOL and HHS alerted employers that the agencies would be developing rules and regulations to implement the PPACA’s shared responsibility payment requirement.  The agencies also requested comments from employers and interested parties.

The IRS observed that the definitions of employer and employee are key in determining whether and, if so, to what extent, an employer may incur a shared responsibility payment.  The IRS indicated that it would likely define “employer” to mean the entity that is the employer of an employee under the common-law test.  Generally, employee would mean a worker who is an employee under the common-law test.  An employer’s status as a large employer would be based on the sum of full-time employees and full-time equivalent employees, the IRS noted.

Keep in mind that the IRS’s observations are just that at this time. The IRS has not issued proposed regulations.  It is unclear when proposed regulations may be released. Additionally, the Supreme Court has agreed to take up the PPACA and the Court could rule that all or part of the PPACA, including the employer shared responsibility payment, is unconstitutional.

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 March 2012.

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.

March 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 3–6.

March 12
Employees who work for tips. Employees who received $20 or more in tips during February must report them to their employer using Form 4070.

March 14
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 7–9.

March 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.

March 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 10–13.

March 21
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 14–16.

March 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 17–20.

March 28
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 21–23.

March 30
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 24–27.

April 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 28–30.

April 6
Employers. Semi-weekly depositors must deposit employment taxes for payroll date of March 31.

The new year brings a new tax filing season. Mid-April may seem like a long time away in January but it is important to start preparing now for filing your 2011 federal income tax return.  The IRS expects to receive and process more than 140 million returns during the 2012 filing season.  Early planning can help avoid any delays in the filing and processing of your return.

Records

Initially, you will need to gather your records for 2011. A helpful jumping-off point is to review your 2010 return. Your personal situation may be unchanged from when you filed your 2010 return or it may have changed significantly.  Either way, your 2010 return is a good vantage point for assembling the materials you will need to prepare your 2011 return.

If you need a copy of your previous year(s) return information, you have several options. You can order a copy of your prior-year return. Alternatively, you may order a tax return transcript or a tax account 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 return transcript does not reflect any changes you or the IRS made after the return was filed. A tax account transcript shows any later adjustments you or the IRS made after the tax return was filed. 

If you changed your name as a result of marriage or divorce since you filed your 2010 return, you must advise the IRS. Your name as it appears on your return needs to match the name registered with the Social Security Administration. A mismatch will likely delay the processing of your return.

Forms W-2

Many taxpayers cannot begin preparing their 2011 income tax returns until they have their Forms W-2, Wage and Tax Statement. Employers have until January 31, 2012 to send you a 2011 Form W-2 earnings statement.  If you do not receive your W-2 by the deadline, contact your employer. If you do not receive your W-2 by mid-February, contact the IRS.  You still must file your return or request an extension to file even if you do not receive your Form W-2. In certain cases, you may be able to file Form 4852, Substitute for Form W-2, Wage and Tax Statement.

Filing deadline

April 15, 2012 is a Sunday. Returns would normally be due the next day, April 16, 2012. However, April 16 is a holiday in the District of Columbia (Emancipation Day). As a result, the due date for 2011 returns is April 17, 2012.  If the mid-April tax deadline clock runs out, you can get an automatic six-month extension of time to file through October 17. However, this extension of time to file does not give you more time to pay any taxes due.  To obtain an extension, you need to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

Casualty losses

Many taxpayers experienced family, business and personal losses from hurricanes, tropical storms, wild fires, floods, and other natural disasters in 2011.  For federal tax purposes, a casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a hurricane, tornado, fire, or other disaster.

Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally-declared disaster, you can choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened. This means you can deduct a 2011 loss on your 2011 return or amended return for that preceding tax year (2010).   If you have any questions about a casualty loss, please contact our office.

Retirement savings

Just because the calendar moved from 2011 to 2012 doesn’t necessarily mean you missed out on contributing to a retirement savings plan. You can contribute up to $5,000 to a traditional IRA for 2011 and you can make the contribution as late as April 17, 2012. However, if you or your spouse is covered by an employer retirement plan, this will affect how much, if any, of your contribution is tax deductible.  Individuals age 50 and older may qualify for a catch-up contribution of $1,000 on top of the $5,000 maximum.  Different rules apply to other types of retirement savings plans.  Our office can review these rules in detail with you.

IRS Fresh Start Initiative

In 2011, the IRS announced a new program, called the Fresh Start Initiative, to help distressed taxpayers. The IRS adjusted its lien policies, increased the dollar threshold when liens are generally issued, made it easier for taxpayers to obtain lien withdrawals, and extended the streamlined offer-in-compromise program.  Previously, the IRS had given its employees greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances where a taxpayer has recently lost a job, is relying solely on Social Security, or is paying significant medical bills.

If you are experiencing hardship, the most important thing you can do is to remain in compliance with your tax obligations. If you owe back taxes, now is the time to pay them, if possible, or enter into an installment agreement, if you qualify, with the IRS. The IRS wants to see you making a good faith effort to pay your taxes.

Tax law changes

Along with assembling records and reviewing activities in 2011, it’s a good idea to review some of the tax law changes in 2011 that may affect your return.  Our office can review your 2010 return and see which areas may have been affected by tax law changes for your 2011 return.  In some cases, popular tax incentives that were available in 2010 were extended into 2011. You don’t want to miss out on any available tax breaks.

If you have any questions about preparing for the 2012 filing season, please contact our office.

As 2012 gets underway, Congress has extended the employee-side payroll tax cut but a laundry list of tax incentives have expired and their renewal is in doubt.  The fate of these incentives, along with the Bush-era tax cuts, will dominate debate in Washington D.C. in 2012.  At the same time, tax planning in a time of uncertainty appears to have become the new normal.

Payroll tax cut

The Temporary Payroll Tax Cut Continuation Act of 2011, approved by Congress on December 23 and signed by President Obama the same day, extends the 2011 payroll tax holiday through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the period January 1, 2012 through February 29, 2012 (10.4 percent for self-employment income). The new law also includes a recapture provision for certain individuals.  However, the House Ways and Means Committee reported that the recapture provision will only apply if the payroll tax reduction is not extended for the remainder of 2012.  Lawmakers are expected to extend the employee-side payroll tax cut through the end of 2012, although not before difficult negotiations.

One speed bump to extending the payroll tax cut through the end of 2012 is its cost. The two-month extension is paid for by increasing certain fees charged to mortgage lenders.  A full-year extension will require additional offsets (unless Congress decides not to offset an extension). Lawmakers are reportedly discussing additional revenue raisers, such as unspecified changes to the S corporation rules and the closing of a loophole for corporate jets.  Other revenue raisers reportedly under consideration are repeal of certain oil and gas preferences and repeal of the last-in, first-out (LIFO) method of accounting.  A variety of spending cuts are also on the table.

Extenders

After December 31, 2011, many popular but temporary tax breaks expire.  The incentives, which are known as “extenders,” impact individuals and businesses.  Some of the more popular individual extenders are the state and local sales tax deduction, the higher education tuition deduction, and the teachers’ classroom expense deduction.  For businesses, the research tax credit is one of the most important extenders. 

One immediate change that many taxpayers will notice is a drop in transit benefits.  In 2011, commuters benefitted from more generous transit benefits.  The 2011 monthly limit on the tax benefit for transit and vanpools of $230 per month reverts to $125 per month in 2012. However, the monthly limit for qualified parking provided by an employer to its employees for 2012 will increase to $240, up $10 from the limit in 2011.

Several bills have been introduced in Congress to extend the expiring incentives. However, the bills have languished in committee. One reason for the lack of movement is that Congress can extend the incentives in 2012 and make them retroactive to January 1, 2012.  The extenders are also separate from the temporary Bush-era tax cuts, which are scheduled to expire after December 31, 2012.  Many lawmakers do not want to link the extenders to the more-controversial Bush-era tax cuts.

IRS budget

One bill that did pass Congress at year-end 2011 was a fiscal year 2012 budget for the IRS.  Congress voted to cut $305 million from the IRS’s FY 2012 budget.  How this cut will impact IRS operations is unknown. In November 2011, the IRS offered buyouts and early outs to back-office employees to reduce its greatest expense: employee payroll.  The IRS could also delay some business systems modernizations to save money.  The IRS will likely keep customer service as close as possible to full funding, especially during the busy 2012 filing season.

Tax planning

One of the most significant challenges to long-term tax planning is the on-again, off-again nature of many tax incentives.  Temporary incentives, such as the research tax credit and the state and local sales tax deduction, have become de facto permanent incentives because they are regularly extended.   Nonetheless, they are temporary. Because of their temporary nature, taxpayers must have two tax plans: one that takes into account an extension of the incentives, and a second plan that does not.

If you have any questions about tax planning and tax legislation in 2012, please contact our office.

Looking back over 2011, the IRS, Congress and the courts made many tax decisions impacting taxpayers of all types. Some tax developments were taxpayer-friendly; others imposed new requirements on taxpayers.  Here is a brief rundown of the top 10 federal tax developments of 2011.

1. Bush-era tax cuts unresolved

Reduced individual income tax rates, marriage penalty relief, an enhanced child tax credit, and much more are part of a package of tax breaks known as the “Bush-era tax cuts.”  All of these incentives were renewed in 2010 and are scheduled to expire after 2012. President Obama wants to allow the Bush-era tax cuts to expire for higher income individuals, which the White House broadly defines as single persons with incomes over $200,000 and families with incomes over $250,000.  In the summer of 2011, the White House and the GOP reportedly came close to an agreement but nothing materialized.  The fate of the Bush-era tax cuts will likely be one of the major issues in the 2012 presidential election.

2. Foreign account reporting oversight increases

Since passage of the Foreign Account Tax Compliance Act (FATCA) in 2010, the Treasury Department and the IRS have ratcheted-up their oversight of foreign accounts.  In December 2011, the IRS issued final Form 8938, Statement of Specified Foreign Assets, which taxpayers will file to report foreign accounts (if they meet certain requirements). The IRS also issued guidance in 2011 for foreign financial institutions about their reporting obligations under FATCA.  In related news, the Treasury Department issued final rules on Form TD-F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) in February 2011. Lastly, the IRS launched a new campaign in 2011 to encourage taxpayers to voluntarily disclose unreported offshore accounts.  The 2011 Offshore Voluntary Disclosure Initiative (OVDI) rewarded taxpayers who came forward voluntarily with a reduced penalty framework (although not as generous as a similar program in 2009).

3. Payroll tax cut extended two months

President Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011 in December 2011. The new law extends the employee-side payroll tax cut through the end of February 2012. The two-month extension is intended to give Congress additional time to negotiate a longer-term extension of the payroll tax cut to cover all of calendar year 2012.

4. Cell phones removed from listed property category

The Small Business Jobs Act of 2010 removed cell phones from the definition of “listed property.”  That category generally requires additional recordkeeping by taxpayers.  In September 2011, the IRS issued guidance on the treatment of employer- provided cell phones as an excludible fringe benefit. When an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee and the IRS will not require recordkeeping of business use to receive this tax-free treatment.

5. IRS launches Voluntary Classification Settlement Program

In September 2011, the IRS launched a new program to enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of a reduced penalty framework.  The Voluntary Classification Settlement Program (VCSP) is open to employers currently treating their workers as independent contractors and who want to prospectively treat the workers as employees. The employer must not be under audit and satisfy other requirements.  The IRS has not announced an end-date to the VCSP.

6. IRS makes mid-year 2011 adjustment to business standard mileage rate

For the third time in six years, the IRS announced a mid-year adjustment to the business standard mileage rate because of rising gasoline prices.  The business standard mileage rate increased from 51 cents-per-mile to 55.5 cents-per-mile for the second half of 2011. The medical/moving standard mileage rate increased from 19 cents-per-mile to 23.5 cents-per-mile for the second half of 2011. Congress did not make a mid-year adjustment to the charitable standard mileage rate, which remained at 14 cents-per-mile for the second half of 2011. For 2012, the business standard mileage rate is 55.5 cents-per-mile and the medical/moving standard mileage rate is 23 cents-per-mile. The statutorily-determined charitable standard mileage rate remains at 14 cents-per-mile for 2012.

7. FUTA surtax expires

In 1976, Congress enacted the 0.2 percent FUTA surtax to help repay federal revenues paid in unemployment benefits. The Worker, Homeownership and Business Assistance Act of 2009 extended the surtax through 2010 and the first six months of 2011.The 0.2-percent FUTA surtax expired after June 30, 2011.  In December 2011, the IRS released Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and accompanying schedules, for 2011. Form 940 for 2011 reflects the mid-year expiration of the FUTA surtax.

8. IRS continues Fresh Start Initiative

During 2011, the IRS continued its Fresh Start Initiative, which the agency explains is its response to the economic slowdown. The Fresh Start Initiative allows lien withdrawals for taxpayers entering into direct debit installment agreements (and for taxpayers who convert from a regular installment agreement to a direct debit agreement).  The IRS also announced it would make streamlined installment agreements available to more small businesses.  Qualified small businesses with $25,000 or less in unpaid taxes can participate in the streamlined installment agreement program.

9. Basis overstatement regs

The Supreme Court agreed in September 2011 to resolve a split among the federal courts of appeal over IRS regulations that impose a six-year limitations period on assessments due to overstated basis.  The IRS asked the Supreme Court to decide, among other questions, whether an understatement of gross income attributable to an overstatement of basis in sold property is an omission from income that can trigger the six-year assessment period.

10. Congress bans tax strategy patents

In September 2011, President Obama signed the America Invents Act.  The new law is a comprehensive overhaul of the nation’s patent laws. The new law treats any strategy for reducing, avoiding or deferring tax liability as prior art under patent law and therefore not patentable.

If you have any questions about these or any tax developments in 2011, please contact our office.

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, requires certain U.S. taxpayers to report their interests in specified foreign financial assets.  The reporting requirement may apply if the assets have an aggregate value exceeding certain thresholds. The IRS has released Form 8938, Statement of Specified Foreign Financial Assets, for this reporting requirement under FATCA.

Reporting

For now, only specified individuals are required to file Form 8938, but specified U.S. entities will eventually also have to file the form. Taxpayers who do not file a federal income tax return for the year do not have to File Form 8938, even if the value of their foreign assets exceeds the normal reporting threshold.

Individuals who have to file Form 8938 include U.S. citizens, resident aliens for any part of the year, and nonresident aliens living in Puerto Rico or American Samoa.

Reporting applies to specified foreign financial assets. Specified foreign financial assets include:

• A financial account maintained by a foreign financial institution;
• Other foreign financial assets, such as stock or securities issued by a non-U.S. person, or an interest in a foreign entity.

The aggregate value of the individual’s specified foreign financial assets must exceed specified reporting thresholds, as follows:

• Unmarried U.S. taxpayers, and married U.S. taxpayers filing a separate return – more than $50,000 on the last day of the year, or more than $75,000 at any time during the year;
• U.S. married taxpayers filing a joint return – more than $100,000 on the last day of the year, or more than $150,000 at any time during the year; or
• Taxpayers living abroad: if filing a joint return, more than $400,000 on the last day of the year, or more than $600,000 during the year; other taxpayers, more than $200,000 on the last day of the year, or more than $300,000 at any time during the year.

Taxpayers who report assets on other forms, such as Form 3520, do not have to report the asset on Form 8938, but must use Form 8938 to identify other forms on which they report.

Filing

Reporting applies for tax years beginning after March 18, 2010, the date that FATCA was enacted. Most taxpayers, such as those who report their taxes for the calendar year, must start filing Form 8938 with their 2011 income tax return.

If you have any questions about Form 8938, please contact our office.

Claiming a charitable deduction for a cash contribution is straightforward. The taxpayer claims the amount paid, whether by cash, check, credit card or some other method, if the proper records are maintained. For contributions of property, the rules can be more complex.

Contributions of property

A taxpayer that contributes property can deduct the property's fair market value at the time of the contribution. For example, contributions of clothing and household items are not deductible unless the items are in good used condition or better. An exception to this rule allows a deduction for items that are not in at least good used condition, if the taxpayer claims a deduction of more than $500 and includes an appraisal with the taxpayer's income tax return.

Household items include furniture and furnishings, electronics, appliances, linens, and similar items. Household items do not include food, antiques and art, jewelry, and collections (such as coins).

To value used clothing, the IRS suggests using the price that buyers of used items pay in second-hand shops. However, there is no fixed formula or method for determining the value of clothing. Similarly, the value of used household items is usually much lower than the price paid for a new item, the IRS instructs. Formulas (such as a percentage of cost) are not accepted by the IRS.

Vehicles

The rules are different for "qualified vehicles," which are cars, boats and airplanes. If the taxpayer claims a deduction of more than $500, the taxpayer is allowed to deduct the smaller of the vehicle’s fair market value on the date of the contribution, or the proceeds from the sale of the vehicle by the organization.

There are two exceptions to this rule. If the organization uses or improves the vehicle before transferring it, the taxpayer can deduct the vehicle’s fair market value when the contribution was made. If the organization gives the vehicle away, or sells it far well below fair market value, to a needy individual to further the organization’s purpose, the taxpayer can claim a fair market value deduction. This latter exception does not apply to a vehicle sold at auction.

To determine the value of a car, the IRS instructs that "blue book" prices may be used as "clues" for comparison with current sales and offerings. Taxpayers should use the price listed in a used car guide for a private party sale, not the dealer retail value. To use the listed price, the taxpayer’s vehicle must be the same make, model and year and be in the same condition.

Most items of property that a person owns and uses for personal purposes or investment are capital assets. If the value of a capital asset is greater than the basis of the item, the taxpayer generally can deduct the fair market value of the item. The taxpayer must have held the property for longer than one year.

Please contact our office for more information about the tax treatment of charitable contributions.

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 January 2012.

January 6

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 31–January 3.

January 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.

January 11

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 4–6.

January 13

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 7–10.

January 17

Monthly depositors. Monthly depositors must deposit employment taxes for payments in December.

January 19

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 11–13.

January 20

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 14–17.

January 25

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 18–20.

January 27

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 21–24.

January 31

Employers. Employers give employees copies of Form W-2 for 2011.

Employers. Employers file Form 945 to report income tax withheld for 2011 on all nonpayroll items. Deposit any undeposited tax (if more than $2,500).

Employers. Employers file Form 941 for the fourth quarter of 2011. Deposit any undeposited tax (if more than $2,500).

Employers file Form 940 to report federal unemployment tax for 2011. Deposit any undeposited tax (if more than $500).

Small employers. Certain small employers file Form 944 to report Social Security, Medicare, and withheld income tax for 2011. Deposit any undeposited tax (if more than $2,500).

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.

Congress’ Joint Select Committee on Deficit Reduction (the so-called “super committee”) failed to reach an agreement by its November 23 deadline after weeks of sparring over the Bush-era tax cuts.  The Budget Control Act of 2011 created the bipartisan super committee in August and instructed it to develop proposals to reduce the federal budget deficit by November 23.  The super committee held many meetings and reportedly debated several proposals, all behind closed doors, to reform the Tax Code and entitlement programs. In the end, however, Democrats and the GOP remained far apart on taxes and entitlement programs and announced they could not agree on a final proposal.

Bush-era tax cuts

One tax item in particular appeared to frustrate the progress of the super committee:  the fate of the Bush-era tax cuts.  Last year, the White House and Congress agreed to extend the Bush-era tax cuts through 2012. Under current law, the following Bush-era tax cuts (not an exhaustive list) will expire after 2012 unless extended:

• Reduced individual income tax rates (10, 15, 28, 33, and 35 percent)
• Reduced capital gains and dividends tax rates
• Marriage penalty relief (expanded 15 percent tax bracket for joint filers and standard deduction for married couples twice that of single individuals)
• Repeal of the limitation on itemized deductions for higher income taxpayers
• Repeal of the phase out of personal exemptions for higher income taxpayers

In September, President Obama sent the super committee a plan that would have extended the Bush-era tax cuts for lower and moderate income individuals but not for higher income taxpayers (which the White House defines as single individuals with incomes over $200,000 and married couples with incomes over $250,000).   The House GOP presented a plan that would have lowered the maximum individual and corporate tax rates to 25 percent.  Several committees and individual lawmakers also sent deficit reduction plans to the super committee.

In the days leading up to the November deadline, Democratic and Republican members of the super committee acknowledged that they had reached little common ground over the fate of the Bush-era tax cuts. On November 21, the co-chairs of the super committee announced that that they "[had] come to the conclusion that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline."

With the super committee sidelined, the fate of the Bush-era tax cuts moves to Congress and the White House.  The GOP-controlled House could try to extend the Bush-era tax cuts in stand-alone legislation but any bill would likely fail to pass the Senate. Additionally, President Obama has repeatedly said he will veto legislation that extends the Bush-era tax cuts for higher income taxpayers.

Payroll tax cut

More immediately, the White House and Congress are currently debating the fate of extending for another year the 2011 payroll tax cut. Wage earners and self-employed individuals took home more pay in 2011 because of a temporary reduction in the employee-share of old age, survivors and disability (OASDI) taxes.  The employee-share of OASDI taxes was reduced from 6.2 percent to 4.2 percent for calendar year 2011 (with similar relief provided to self-employed individuals). ). Although both sides of the aisle in Congress agree that an extension through 2012 is desirable, consensus must be achieved in agreeing to ways to pay for its $263 billion price tag.  An agreement is expected sometime in December, although prospects are not entirely certain.

Budget cuts

The super committee’s failure to deliver a deficit reduction plan automatically triggers spending cuts after 2012. Under the Budget Control Act, the spending reductions will be achieved through a combination of sequestration (for FY 2013) and the downward adjustment of discretionary spending limits for FY 2014-FY 2021. This means that Congress must determine the manner in which reductions are made to the federal government’s budget, including the IRS, through the annual appropriations process each year.  However, some programs, such as Social Security and Medicaid, are exempt from the budget cuts.

President Obama and Congress could agree to modify the spending reductions under the Budget Control Act.  On November 21, President Obama said he will veto any bills that remove the automatic triggers in the Budget Control Act. President Obama is reportedly using the veto threat to keep pressure on Congress to reach an agreement over the fate of the Bush-era tax cuts and entitlement spending.

If you have any questions about the super committee, the Bush-era tax cuts or the prospects for tax reform, please contact our office.

On November 21, President Obama signed into law the 3% Withholding Repeal and Job Creation Act. The new law does much more than merely repeal withholding on government contractors. The new law enhances the Work Opportunity Tax Credit (WOTC) for veterans of the U.S. Armed Forces, expands the IRS’ continuous levy authority, and more.

Government withholding

The Tax Increase Prevention and Reconciliation Act of 2005 (2005 Tax Act) created a new withholding requirement for government agencies. The federal government, and every state and local government, would be required to withhold income tax at the rate of three percent on certain payments to persons providing any property or services. Some payments, such as payments of interest, were exempt.

The government withholding requirement was originally scheduled to apply to payments made after December 31, 2010. Congress delayed the effective date to payments made after December 31, 2011. The IRS issued final regulations in 2011, further delaying the effective date to payments made after December 31, 2012.

Since passage of the 2005 Tax Act, momentum for the repeal of withholding on government contractors has grown. The Senate approved the 3% Repeal Act unanimously on November 10, and the House voted 422–0 in favor of the bill on November 16. The 3% Repeal Act repeals government withholding as if it had never been enacted.

Veterans

The WOTC provides employers an incentive to hire individuals from various target groups, including veterans, The 3% Repeal Act modifies the WOTC for qualified veterans. The WOTC enhancements for veterans are called the Returning Heroes Tax Credit and the Wounded Warrior Tax Credit.

Returning Heroes Tax Credit. The Returning Heroes Tax Credit encourages employers to hire unemployed veterans. Employers hiring short-term unemployed veterans (generally veterans who have been unemployed for at least four weeks but less than six months) may be eligible for a credit of up to $2,400 per employee. The credit reaches $5,600 per employee if the employer hires a veteran who has been unemployed for longer than six months.

Wounded Warriors Tax Credit. The Wounded Warriors Tax Credit rewards employers that hire unemployed veterans with service connected disabilities. The credit reaches $9,600 per employee for employers that hire long-term unemployed veterans with service connected disabilities and $4,800 per employee for employers that hire short-term unemployed veterans with service-connected disabilities.

The 3% Repeal Act also extends the current WOTC for qualified veterans who receive food stamps through the end of 2012. The credit for qualified veterans in this target group can reach $2,400 per employee. Additionally, the 3% Repeal Act makes the WOTC for qualified veterans available to tax-exempt employers and streamlines the certification process.

The changes to the WOTC under the 3% Repeal Act are effective for veterans who begin work for an employer after November 21, 2011 (the date of enactment of the new law). The 3% Repeal Act, however, is temporary and its enhancements to the WOTC for veterans will expire after 2012 unless extended by Congress.

IRS continuous levy

The Taxpayer Relief Act of 1997 authorized the IRS to collect overdue tax debts of individuals and businesses that receive federal payments by levying up to 15 percent of each payment until the debt is paid. In 2004, Congress increased the percentage to 100 percent in case of certain payments due to vendors of services or goods sold or leased to the federal government. The 3% Repeal Act authorizes the IRS to continuously levy at 100 percent on payments for goods, services and property due to vendors of the federal government. This change is effective for levies issued after November 21, 2011 (the date of enactment of the new law).

More provisions

The 3% Repeal Act also:

• Changes the definition of modified adjusted gross income for purposes of the Code Sec. 36B health insurance premium assistance tax credit and certain other federal health care programs
• Extends information sharing between the IRS and the U.S. Department of Veterans Affairs (VA)
• Enhances federal job training programs for veterans
• Directs the Treasury Department to prepare a report on the tax gap and government contractors

If you have any questions about the 3% Withholding Repeal Act, please contact our office.

As 2011 winds down, investors should consider several last-minute strategies to improve their bottom line tax liability. Many of these strategies follow traditional advice applicable to any year-end. Others, however, are unique to 2011, not only because of the continuing impact of the economy but also because of major tax changes that are threatening for 2013, which is just a little more than a year away.

Long- and short-term gains

Long-term stock gains and qualified cash dividends continue to be taxed at the favorable maximum rate of 15 percent in 2011 and again in 2012. For lower-income investors in the 10 and 15 percent income tax brackets, a zero rate applies to stock gains and dividend income. Long-term capital gains rates apply to stock (and other investments) held for more than one year. Qualified dividend rates apply for stock held more than 60 days of a prescribed period around the dividend's record date. Short-term gains are taxed at ordinary income rates and apply to stock held for one year or less.

If your stock has declined in value, it may make sense to sell it and recognize the loss. Capital losses have to be netted against capital gains, but net capital losses can be deducted dollar-for-dollar against ordinary income, up to $3,000 a year ($1,500 for married individuals filing separately). Excess capital losses above $3,000 are carried over to the following year and can be deducted against another $3,000 of ordinary income (after netting with any capital gains in the succeeding year).

Wash sale rules

If you expect the market to improve, you may want to hold on to your stock, even if it has dropped in value. It may be tempting to sell the stock, to recognize the loss, and then repurchase the same stock;however, the tax code under its so-called wash sale rules will not let you take the loss if you purchase identical stock within 30 days before or after you sell your shares. Another option is to sell your shares, wait 31 days, and then repurchase the stock.

Timing

Stock traded in an over-the-counter market or on a regulated national securities exchange is generally treated as sold on the date the taxpayer enters into a binding contract to sell the stock. This is the trade date, in contrast to the settlement date, when deliveries of the stock certificate and payment are made (generally the fifth business day after the trade date). The trade date is also the end of the selling taxpayer's holding period for purposes of determining long- or short-term gain.

For short sales, however, the IRS insists on following a rule with a slight twist.  If the stock price falls and a gain will result, the gain is realized on the trade date, when the seller directs his or her broker to purchase shares. On the other hand, if the price rises and a loss will result, the loss is not realized until the stock is delivered on the settlement date.

In either case, remember that for 2011, December 31 falls on a Saturday, making December 30, 2011 the last day on which the public stock exchanges are open.

Long-term holding period

This year, year-end tax selling strategies should also be coordinated with year-end tax buying. In addition to the traditional attention given to the wash-sale rules on the repurchase of securities, investors should be aware that the rates on long-term capital gains quite possibility will be going up dramatically after 2012, when the Bush-era tax rates end.  In default of Congressional action, the maximum rate on net long-term capital gains will rise from 15 percent to 20 percent.  Since long-term gain is available only on assets held for more than one year, investors should be aware that the gain on stock and other capital assets purchased after 2011 quite likely will be subject to a higher tax rate. Year-end 2011 should therefore present an opportunity to get your long-term investment strategies in order so that, if forced to sell at year-end 2012 before a 2013 rate increase, you will be able to take advantage of the lower long-term rates.

If you would like further to refine your year-end investment strategies, please do not hesitate to contact this office.

The term "sick pay" can refer to a variety of payments. Some of these payments are nontaxable, while others are treated as taxable income. Some of the taxable payments are treated as compensation, subject to income tax withholding and employment taxes; others are exempt from some employment taxes. 

Amounts received for personal injury or sickness through an accident or health plan are taxable income if the employer paid for the plan. If the coverage is provided through a cafeteria plan, the employer, not the employee, is considered to have paid the premiums; thus, the benefits are included in income. If, on the other hand, the employee paid the entire cost of the premiums (or included the premiums in income), then any amounts paid under the plan for personal injury or sickness are not included in income. 

An employee who is injured on the job may receive workers' compensation under a workers’ compensation act. These amounts are fully exempt from income and employment taxes. However, the exemption does not apply to retirement plan benefits that are based on age, length of service, or prior contributions, even if retirement was triggered by occupational sickness or injury. The exemption also does not apply to amounts that exceed the amount provided in the worker’s compensation act. There is no exemption under these plans for amounts received as compensation for a nonoccupational injury or sickness.

Compensatory damages paid for physical injury or physical sickness are not taxable, whether paid in a lump sum or as periodic payments. This applies to amounts received through prosecution of a legal suit or action or through a settlement agreement in lieu of prosecution.  Other nontaxable benefits include disability benefits paid for loss of income or earning capacity as a result of injuries under a no-fault automobile insurance policy.

Payments for permanent injury or loss of a bodily function under an employer-financed accident or health plan are excludible. The payments must be based on the nature of the injury rather than on the length of time the employee is absent from work.

Disability income plans are employer plans that provide full or partial income replacement for employees who become disabled. Employer-provided disability income benefits generally are taxable to employees. Similarly, sick pay that is a continuation of some or all of an employee’s compensation is subject to income tax withholding if paid by the employer. The first six months of payments for sickness or disability, when the employee is off work, are subject to employment taxes, but payments made after the expiration of six months are not subject to FICA (Social Security) and FUTA (unemployment) taxes.

Reimbursements from an employer’s plan for medical expenses are not includible in income and are not subject to income tax withholding. If the employer has no plan or system and pays medical expenses for sickness or disability, the payments are subject to FICA and FUTA for the first six months. Of course, reimbursements of amounts deducted in a prior year must be included in income. Medical reimbursements provided under a self-insured employer plan are not subject to income tax withholding, even if the amounts are included in income.

Payments for sick leave or accumulated sick leave are taxable compensation.

Depreciation is a reasonable allowance for wear and tear on property used in a trade or business or for the production of income. Property is depreciable if it has a useful life greater than one year and depreciates in value. Property that appreciates in value may also  depreciate if subject to wear and tear. Depreciation ends in the tax year that the asset is retired from service (by sale, exchange, abandonment or destruction) or that the asset is fully depreciated.

Assets with useful lives of one year or less can be deducted as current expenses in the year of their costs. Depreciation cannot be claimed on an asset that is acquired and disposed of in the same year.

Depreciation begins in the tax year that the property is placed in service for either the production of income or for use in a trade or business. Property generally is considered placed in service when it is in a condition or state of readiness to be used on a regular, ongoing basis. The property must be available for a specifically assigned function in a trade or business (or for the production of income).

An asset actually put to use in a trade or business is clearly considered placed in service. If, on the other hand, an asset is not actually put to use, it is generally not considered placed in service unless the taxpayer has done everything he or she can to put the asset to use. For example, a barge was considered placed in service in the year it was acquired, even though it could not be actually used because the body of water was frozen. For a building that is intended to house machinery and equipment, the building's state of readiness is determined without regard to whether the machinery and equipment has been placed in service. Leased property is placed in service by the lessor when the property is held out for lease.

Generally, the year property is placed in service is the tax year of acquisition, but it could be a later time. An asset cannot be placed in service any sooner than the time that the business actually begins to operate.

In the case of agriculture, livestock cannot be depreciated until it reaches maturity and can be used; orchards cannot be depreciated until the trees produce marketable quantities of crops. Prior to those times, costs must be capitalized and cannot be written off.

Especially at year-end, placing an asset in service before the new year can mean the difference between claiming a substantial amount of depreciation on this year's return instead of waiting a full year. If you have any questions on how to qualify a business asset under this deadline, please contact this office.

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 December 2011.

December 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 26–29.

December 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 30–December 2.

December 9

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 3–6.

December 12

Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.

December 14

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 7–9.

December 15

Corporations. Corporations deposit fourth installment of estimated income tax for 2011.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in November.

December 16

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 10–13.

December 21

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 14–16.

December 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 17–20.

December 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 21–23.

December 30

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 24–27.

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.

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.

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 2015. 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 2015.

Year-end charitable giving can benefit your 2015 tax bottom-line

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 2015. 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 2015.

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

Unless a charitable 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 will have officially expired after December 31, 2014. It is unclear if Congress will extend the incentive retroactively for 2015 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 will no longer be available for the 2015 tax year and beyond. They include special rules for contributions of food inventory.

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. Properly valuing the items to withstand any IRS examination is also important.

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.

As 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 allowable deductions; however, some deductions are not impacted. For purposes of the limitation on itemized deduction, a taxpayer's total, itemized deductions do not include deductions for medical expenses, investment interest expenses, casualty or theft losses, and allowable wagering losses; charitable deductions do count, however.

If you have any questions about the mechanics of tax-deductible charitable contributions, please contact our office.

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 15^th 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.

Job-hunting expenses are generally deductible as long as you are not searching for a job in a new field. This tax benefit can be particularly useful in a tough job market. It does not matter whether your job hunt is successful, or whether you are employed or unemployed when you are looking.

Expenses directly connected with a job search are deductible as a miscellaneous itemized deduction. You can deduct job-hunting expenses if the amount of all your so-called miscellaneous itemized deductions exceeds two percent of your adjusted gross income. However, if you claim the standard deduction, you cannot deduct job-hunting expenses. Therefore, as a practical matter for many job seekers, job hunting expenses do not materialize as a tax deduction.

For those who are able to use job seeking expenses as a deduction, it can be difficult to determine what a new field is. A professional photographer who pursues a job in the retail industry clearly is searching in a new field and cannot deduct any of his or her job-hunting expenses. But there are exceptions. The IRS has allowed persons who retired from the military to search for jobs in new fields and claim their job-hunting expenses. Taking a temporary job while searching for permanent employment in your current field will not be considered a job change that disqualifies your job-hunting expenses.

Persons entering the job market for the first time, such as college students, and persons who have been out of the job market for a long period of time, such as parents of young children, cannot deduct their job-hunting expenses. However, a college student who worked in a particular field while in school may be able to deduct job-hunting expenses.

Deductible expenses include typing, printing and mailing a resume. Long-distance phone calls are also deductible. You can deduct travel costs for going on a job search or an interview, including air transportation, railroad, or car expenses. The standard rate for car expenses for business is 55 cents per mile for 2012. Amounts you pay to a job counselor, employment agency or job referral service are all deductible.

It is important to keep records of your costs. While your individual expenses may not be substantial, your total expenses can add up to a significant amount.

November 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 26–28.

November 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 29–November 1.

November 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 2– 4.

November 10
Employees who work for tips. Employees who received $20 or more in tips during October must report them to their employer. Form 4070 may be used.

Employers. Employers file Form 941 for the third quarter of 2011.

November 14

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 5–8.

November 15
Monthly depositors. Monthly depositors must deposit employment taxes for payments in October.

November 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 9–11.

November 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 12–15.

November 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 16–18.

November 28
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 19–22.

November 30
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 23–25.

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 September 2011.

September 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 27-30.

September 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 31-September 1 and 2.

September 9

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 3-6.

September 12

Employees who work for tips. Employees who received $20 or more in tips during August must report them to their employer using Form 4070.

September 14

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 7-9.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in August.

September 15

Individuals. Third installment of estimated income tax for 2011 is due, using Form 1040-ES.

Corporations.  Third installment of estimated income tax for 2011 is due, using worksheet, Form 1120-W.

Corporations.  Corporations that timely requested an automatic six-month extension to file a 2010 calendar year income tax return Form 1120 (Form 1120S for S corporations) must file and pay any tax, interest and penalties due.  S corporations on such extension must also provide each shareholder with a copy of Schedule K-1 (Form 1120S).

Partnerships.  Partnerships that timely requested an automatic five-month extension to file a 2010 calendar year income tax return Form 1065 must file, using Form 1065 and provide each partner with a copy of Schedule K-1 (Form 1065).

September 16

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 10-13.

September 21

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 14-16.

September 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 17-20.

September 28

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 21-23.

September 30

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 24-27.

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.

Adoptive parents may be eligible for federal tax incentives. The Tax Code includes an adoption tax credit to help defray the costs of an adoption.  Recent changes to the adoption tax credit make it very valuable.

Temporary increase

In 2010, Congress temporarily increased the dollar limitation for the adoption tax credit (and the income exclusion for employer-provided adoption expenses) by $1,000 (from $12,170 to $13,170 for 2010 and indexed for inflation for tax years beginning after December 31, 2010). Congress also made the adoption tax credit refundable for 2010 and 2011. These enhancements, however, are scheduled to expire after December 31, 2011 unless Congress extends them.

Your income is another factor to take into account. You may not receive the full amount of the adoption tax credit for 2010 if your modified adjusted gross income (MAGI) is $182,520 or more. The adoption tax credit is completely phased out if your MAGI is $222,520 or more. These amounts may be adjusted for inflation by the IRS in 2011.  Additionally, to prevent double benefits, the adoption tax credit is coordinated with the exclusion for employer-provided adoption assistance

Qualified expenses

A number of adoption-related expenses may qualify for the tax credit. These expenses include, but are not limited to, reasonable and necessary adoption fees, travel expenses, fees paid to attorneys, and court costs.  The IRS has identified on its website some expenses that are excluded, such as expenses related to the adoption of the child of a taxpayer’s spouse, the costs of a surrogate parenting arrangement, and expenses that violate state or federal law.  Additionally, expenses related to a foreign adoption qualify only if the taxpayer actually adopts the child.  That rule is different if a domestic adoption is unsuccessful.

Eligible child

An eligible child for purposes of the adoption tax credit is an individual who has not attained the age of 18 at the time of the adoption, or is physically or mentally incapable of caring for himself or herself. A child has special-needs if the child otherwise meets the definition of eligible child, the child is a U.S. citizen or resident, a state determines that the child cannot or should not be returned to his or her parent's home, and  a state determines that the child probably will not be adopted unless assistance is provided. 

Form 8839

Taxpayers file Form 8839, Qualified Adoption Expenses, to claim the adoption tax credit.  At this time, Form 8839 cannot be filed electronically; it must be filed on paper because the IRS requires you to attach supporting documentation.

The IRS requires different documents if the adoption is foreign or domestic, final or not final, and if the adoption is of a child with special needs. The IRS has issued special safe harbor rules for certain foreign adoptions. The home country of the child may be included in the safe harbors which streamline some of the documentation requirements.

The IRS recommends that taxpayers keep the following records: Receipts for qualified adoption expenses, final decree, certificate or order of adoption, home study by an authorized placement agency, child placement agreements or court orders, and determination of special needs status by a State or the District of Columbia.

Processing Form 8839 can take some time. One of the most common mistakes taxpayers make is failing to attach supporting documents.   After the IRS conducts an initial review of Form 8839, it notifies taxpayers explaining any additional steps they need to take, such as providing certain documentation to establish whether they are eligible for the credit.

If you have any questions about the adoption tax credit, please contact our office.

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.

Congress has returned to work after its August recess under a tight deadline to reduce the federal budget deficit and also, possibly, extend some expiring tax incentives.  Between now and the end of the year, Congress could enact significant tax reform in a deficit reduction package; or it may take a piecemeal approach. All this Congressional activity contributes to uncertainty in tax planning.

Joint committee’s task

On August 2, 2011, President Obama signed the Budget Control Act of 2011 (P.L. 112-25).  Along with cutting approximately $1 trillion in federal spending and raising the federal debt ceiling, the Budget Control Act creates a special a bipartisan joint select committee of Congress to propose more deficit reduction measures.   The Budget Control Act charges the Joint Select Committee on Deficit Reduction with reducing the federal government budget deficit by at least $1.5 trillion over fiscal years 2012 to 2021. If the joint committee cannot agree on deficit reduction measures, or if Congress rejects the committee’s proposals, the Budget Control Act provides for automatic cuts over the coming decade.

The12-member joint committee is composed of an equal number of members from both parties: six Democrats and six Republicans.  The joint committee must make its proposals, in legislative language, not later than November 23, 2011 (if a majority of the committee agrees on the proposals). Congress must vote on the proposals not later than December 23, 2011.

Flood of proposals expected

The joint committee is expected to be flooded with proposals to reduce the federal deficit.  President Obama has urged the joint committee to take a “balanced approach” to deficit reduction. The president has called for reducing the federal deficit through a combination of spending cuts and revenue raisers. Some of the tax provisions mentioned by President Obama for repeal or reform include tax incentives for oil and gas producers and the last-in, first-out (LIFO) method of accounting. President Obama also wants Congress to extend the two percent payroll tax cut, which is scheduled to expire after 2011.

One of the most contentious proposals the joint committee may address is the fate of the Bush-era tax cuts. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act (2010 Tax Relief Act) extended the Bush-era tax cuts through the end of 2012. President Obama wants to extend the Bush-era tax cuts for lower and middle income taxpayers but not for higher income taxpayers (which the White House defines as individuals with incomes over $200,000 and families with incomes over $250,000).  It is unclear at this time if the joint committee will take up the Bush-era tax cuts.

The joint committee may look to some recent tax reform proposals for guidance. In 2010, the President's National Commission on Fiscal Responsibility and Reform developed a six-part plan to reduce the federal deficit. The commission recommended reducing or eliminating many tax incentives for individuals in exchange for lower individual income tax rates. The commission also endorsed lowering the corporate tax rate to 26 percent. In July 2011, a bipartisan group of senators, known as the "gang of six," introduced a plan for deficit reduction. The senators' plan would, among other provisions, replace the current individual income tax rate schedule with three new tax brackets along with abolishing the alternative minimum tax (AMT).

Expiring tax provisions

A number of popular but temporary tax incentives (known as “tax extenders) are scheduled to expire after 2011. In past years, Congress has routinely extended many of them. This year may be different. The joint committee could include the tax extenders in its work, extending some but allowing others to expire. Alternatively, the joint committee could decide not to touch the tax extenders. In that case, some or all of them could be extended in separate legislation.

Some of the extenders scheduled to expire after 2011 are (not an exhaustive list):

• Research tax credit
• 15-year recovery for qualified leasehold improvements, restaurant property and retail improvements
• Work Opportunity Tax Credit
• Employer wage credit for activity military reservists
• Indian employment credit and accelerated depreciation for business property on Indian reservations
• Special expensing rules for film and production costs
• Basis adjustment to stock of an S corporation making charitable contributions
• Enhanced deduction for charitable contributions of food inventory, corporate charitable contributions of book inventory and corporate charitable contributions of computers
• Expensing of environmental remediation costs
• Grants for investment in certain energy property in lieu of tax credits
• Income tax credit for alcohol fuels
• Refined coal production facilities credit
• Tax treatment of payments to controlling exempt organizations
• Subpart F exceptions for active financing income

Additionally, one hundred percent bonus depreciation is scheduled to expire after 2011 (except for property with a longer production period).  Enhanced Code Sec. 179 expensing ($500,000 maximum amount/$2 million investment ceiling) also is scheduled to expire after 2011.

At this time, September 2011, it is not too early to contemplate how tax reform could impact your planning. Please contact our office and we can schedule a time to review your tax strategy.