Cleaning Up The Tax Mess PBS Video

Cleaning Up The Tax Mess

New Voluntary Worker Classification Settlement Program

The Internal Revenue Service has launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.

This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

This is part of a larger “Fresh Start” initiative at the IRS to help taxpayers and businesses address their tax responsibilities.

The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

To be eligible, an applicant must:

• Consistently have treated the workers in the past as nonemployees,

• Have filed all required Forms 1099 for the workers for the previous three years

• Not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

Full details, including FAQs, are available on the Employment Tax on IRS.gov, and in Announcement 2011-64

 

 

New Credits for Hiring Veterans

Congress recently passed legislation that extends and expands the Work Opportunity Credit (WOTC) for hiring unemployed veterans. This effectively gave a one-year lease on life to the WOTC, but only with respect to qualified veterans who begin work for the employer before January 1, 2013. For all other classifications, the credit ended at the close of 2011.

 

Under the new law, effective for individuals who begin work for the employer after November 21, 2011, a qualified veteran is a veteran who is certified by the designated local agency as falling within one of the following five categories:

 

• Veteran Who is a Member of a Family Receiving Food Stamps for At Least Three Months – The individual is a member of a family receiving assistance under a food stamp program under the Food and Nutrition Act of 2008 for at least three months, all or part of which is during the 12-month period ending on the hiring date. The maximum qualifying first-year wage taken into account is $6,000. Thus, the maximum WOTC is $2,400 (.4 x $6,000).

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• Veteran Entitled to Compensation for a Service-Connected Disability Hired Within First Year after Separation from Service – The individual is entitled to compensation for a service-connected disability, and has a hire date that isn’t more than one year after having been discharged or released from active duty. The maximum qualifying first-year wage taken into account is $12,000. Thus, the maximum WOTC is $4,800 (.4 x $12,000).

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• Veteran Entitled to Compensation for a Service-Connected Disability with Six Months of Unemployment in the Year Preceding the Hire Date – The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date that equal or exceed six months. The maximum qualifying first-year wage taken into account is $24,000. Thus, the maximum WOTC is $9,600 (.4 x $24,000).

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• Veteran Has Aggregate Periods of Unemployment Exceeding Four Weeks in the Year Preceding the Hire Date – The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed four weeks (but less than six months). The maximum qualifying first-year wage taken into account is $6,000. Thus, the maximum WOTC is $2,400 (.4 x $6,000).

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• Veteran Has Aggregate Periods of Unemployment Exceeding Six Months in the Year Preceding the Hire Date – The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. The maximum qualifying first-year wage taken into account is $6,000. Thus, the maximum WOTC is $5,600 (.4 x $14,000).

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Fast-track qualification process for qualified veterans – Effective for individuals who begin work for the employer after November 21, 2011, a veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of:

• If he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than six months during the 1-year period ending on the hiring date.

 

• If he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than four weeks (but less than six months) during the 1-year period ending on the hiring date.

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Tax-exempt employers qualify for the credit – Effective for qualified veterans who begin work for the employer after November 21, 2011, a tax-exempt employer may claim a credit for the WOTC it could claim for hiring qualified veterans if it were not tax-exempt.

 

Credit Limited to OASDI – The credit is allowed against the OASDI (Social Security) tax that the exempt employer would otherwise have to pay on the wages of all its employees during the one-year period beginning with the day the qualified veteran goes to work for the tax-exempt organization and cannot exceed the OASDI tax for that one year period.

Other limits applicable to tax-exempt employers:

• The general credit percentage of qualifying first-year wages is 26% (instead of 40%).

• The credit percentage of qualifying wages is 16.25% (instead of 25%) for a qualified veteran who has completed at least 120, but less than 400, hours of service for the employer.

• The tax-exempt employer may only take into account wages paid to a qualified veteran for services in furtherance of the activities related to the purposes or function constituting the basis of the organization’s exemption.

If you would like additional information related to the WOTC and hiring unemployed veterans, please give this office a call.

 

 

Related articles

• It’s Time for Year-End Tax Planning (tigertail6.wordpress.com)

Are You Required to File 1099s?

If you use independent contractors to perform services for your business and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year to avoid facing the loss of the deduction for their labor and expenses and to avoid a monetary penalty. The 1099s for 2011 must be provided to the independent contractor no later than January 31, 2012.

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In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28. The 1099s must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS along with the required 1096 transmittal form. This service provides recipient and file copies for your records. Use the worksheet to provide us with the information we need to prepare your 1099s.

Please attempt to have the information to this office by January 20, so that the 1099s can be provided to the service providers by the January 31 due date.

If you have questions, please call this office.

Are You Liable for a Gift Tax Return?

Frequently, taxpayers think that gifts of cash, securities, or other assets they give to other individuals are tax-deductible and, in turn, the gift recipient sometimes thinks income tax must be paid on the gift received. Nothing is further from the truth. To fully understand the ramifications of gifting, one needs to realize that gift tax laws are related to estate tax laws.

When a taxpayer dies, the value of his or her gross estate (to the extent it exceeds the excludable amount for the year) is subject to estate taxes. Naturally, individuals want to do whatever they can to maximize their beneficiaries’ inheritances and limit the estate’s amount of inheritance tax. Because giving away one’s assets before dying reduces the individual’s gross estate, the government has placed limits on gifts, and if those gifts exceed the limit, they are subject to gift tax that must be paid by the giver.

Gift Tax Exclusions – Certain gifts are excluded from the gift tax.

• Annual Exclusion – This is the annual amount that an individual can give to any number of recipients. This amount is adjusted for inflation, and for 2011, it is $13,000. For example, a taxpayer with five children could have given $13,000 to each child in 2011 without any gift tax consequences. The taxpayer cannot deduct the dollar value of the gifts, and the value of the gifts is not taxable to the recipients. Generally, for a gift to qualify for the annual exclusion, it must be a gift of a “present interest.” That is, the recipient’s enjoyment of the gift can’t be postponed into the future. For gifts to minor children, there is an exception to the “present interest” rule where a properly worded trust is established.

• Lifetime Limit – In addition to the annual amounts, taxpayers can use a portion of the federal estate tax exemption (it is actually in the form of a credit) to offset an additional amount during their lifetime without gift tax consequences. However, to the extent this credit is used against a gift tax liability, it reduces the credit available for use against the federal estate tax at the taxpayer’s death. For 2011, the credit-equivalent lifetime gift tax exemption is $5 million and is the same as for the estate tax exemption.  The federal estate tax exemption will increase from $5,000,000 to $5,120,000 for the estates of decedents who die in 2012. This also means that both the lifetime gift tax exemption and generation skipping transfer tax exemption will increase from $5,000,000 to $5,120,000 in 2012.

• Education & Medical Exclusion – In addition to the amounts listed above, there are two additional types of gifts that can be excluded from the gift tax:

(1) Amounts paid by one individual on behalf of another individual directly to a qualifying educational organization as tuition for that other individual.

(2) Amounts paid by one individual on behalf of another individual directly to a provider of medical care as payment for that medical care. Payments for medical insurance qualify for this exclusion.

If, during the year, your gifts exceed the sum of the annual, education, and medical exclusions, you are required to file a gift tax return (even if you have not exceeded the lifetime limit).

Gifts of Capital Assets – Sometimes a gift might be in the form of securities, real estate, or other items that have appreciated in value. In these situations, the gift value is the item’s fair market value at the time of the gift. However, when the recipient of the gift sells that asset, he or she will measure his or her gain from the giver’s tax basis. For example, a parent gifts 100 shares of XYZ, Inc. worth $9,000 to his or her child. If the parent originally paid $5,000 for the shares and if the child sold the shares for $9,000, the child (the recipient) would be liable for the tax on the $4,000 gain. In effect, the parent (giver) transferred the taxable gain in the stock to the child. This can be beneficial from a tax standpoint if the child is not subject to the “kiddie tax” rules and is in a lower tax bracket than the parent. Caution: Watch out for unintended gifts such as an elderly parent placing a child on the title of the home or other assets.

Gift-Splitting by Married Taxpayers – If the gift-giver is married and both spouses are in agreement, gifts to recipients made during a year can be treated as split between the husband and wife, even if the cash or property gift was made by only one of them. Thus, by using this technique, a married couple can give $26,000 a year to each recipient under the annual limitation discussed previously.

If you have additional questions or would like this office to assist you in planning an appropriate gifting strategy, please give us a call.

It’s Tax Time! Are You Ready?

If you’re like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Unfortunately, the job of pulling together the records for your tax appointment is never easy, but the effort usually pays off when it comes to the extra tax money you save! When you arrive at your appointment fully prepared, you’ll have more time to:

• Consider every possible legal deduction;

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• Better evaluate your options for reporting income and deductions to choose those best suited to your situation;

• Explore current law changes that affect your tax status;

• Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives

The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but later year returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your taxes.

For example, the law allows choices in transactions such as:

Sales of property

If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time, as you receive payments from the buyer.

Depreciation

You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the cost over a number of years, or in certain cases, you can deduct them all in one year.

Higher Education Expenses

If you are paying college expenses for yourself, your spouse, or your dependent(s), you may qualify for a tax benefit of either an above-the-line tax deduction or a tax credit.

Where to Begin?

Ideally, preparation for your tax appointment should begin in January of the tax year with which you’re working. Right after the New Year, set up a safe storage location—a file drawer, a cupboard, a safe, etc. As you receive pertinent records, file them right away, before they’re forgotten or lost. By making the practice a habit, you’ll find your job a lot easier when your actual appointment date rolls around.

Other general suggestions to consider for your appointment preparation include…

• Segregate your records according to income and expense categories. For instance, file medical expense receipts in an envelope or folder, interest payments in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, make certain you fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully to be sure you don’t miss important data. Organizers are designed to remind you of transactions you may miss otherwise.)

• Keep your annual income statements (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships, etc.) separate from your other documents. Be sure to take these documents to your appointment, including the instructions for K-1s!

• Write down questions you may have so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to the income for the current year. For instance, a dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale.

• Make certain that you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions for returns filed without them.

• Compare deductions from last year with your records for this year. Did you forget anything?

• Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy Even for Basic Details

To ensure the greatest accuracy possible in all details on your return, make sure you review personal data. Check name(s), address, social security number(s), and occupation(s) on last year’s return. Note any changes for this year. Although your telephone number isn’t required on your return, current home and work numbers are always helpful should questions occur during return preparation.

Marital Status Change

If your marital status changed during the year, if you lived apart from your spouse, or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce, or property settlement agreements, if any, to your appointment.

Dependents

If you have qualifying dependents, you will need to provide the following for each:

• First and last name

• Social security number

• Birth date

• Number of months living in your home

• Their income amount (both taxable and nontaxable)

If you have dependent children over age 18, note how long they were full-time students during the year. To qualify as your dependent, an individual who is not a qualifying child must pass several strict dependency tests. If you think a person qualifies as your dependent (but you aren’t sure), tally the amounts you provided toward his/her support vs. the amounts he/she provided. This will simplify making a final decision about whether you really qualify for the dependency deduction.

Some Transactions Deserve Special Treatment

Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions:

Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate, and any other type of property need to be reported on your return, even if you had no profit or loss. List each sale and have the purchase and sale documents available for each transaction. New for 2011, when a broker knows the purchase price of the stock that was sold during the year, the brokerage firm is required to show that amount on the broker transaction report, Form 1099-B.

Purchase date, sale date, cost, and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.

Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it and its value when you received it. If you sell property you inherited, you need to know the date of the decedent’s death and the property’s value at that time. You may be able to find this information on estate tax returns or in probate documents. If the property was inherited from someone who died in 2010, special complicated rules may apply in determining your inherited basis. Please call for further details.

Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends. If you sold mutual fund shares, you may have received a statement from the fund that shows your average cost basis for the shares sold and any “wash sale” adjustments. Be sure to bring this statement to your appointment along with the purchase and reinvestment records you have.

Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude all (or a part) of a gain on a home if you meet certain ownership, occupancy, and holding period requirements. If you file a joint return with your spouse and your gain from the sale of the home exceeds $500,000 ($250,000 for other individuals), record the amounts you spent on improvements to the property. Remember too, possible exclusion of gain applies only to a primary residence, and the amount of improvements made to other homes is required regardless of the gain amount. Be sure to bring a copy of the sale documents (usually the closing escrow statement) with you to the appointment.

Home Energy-Related Expenditures: If you made home modifications to conserve energy (such as special windows, roofing, doors, etc.) or installed solar, geothermal, or wind power generating systems, please bring the details of those purchases and the manufacturer’s credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit.

Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. To claim auto-related business expenses, the government requires that you provide your total mileage, business miles, and commuting miles for each car on your return, so be prepared to have that information available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether the reimbursement is included in your W-2.

Charitable Donations: Cash contributions (regardless of amount) must be substantiated with a bank record or written communication from the charity showing the name of the charitable organization, date, and amount of the contribution. Cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible unless verified by receipt from the charitable organization.

For clothing and household contributions, the items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. A record of each item contributed must be kept, indicating the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued less than $250 and dropped off at an unattended location do not require a receipt. For contributions of $500 or more, the record must also include when and how the property was acquired and your cost basis in the property. For contributions valued at $5,000 or more and other types of contributions, please call this office for additional requirements.

Foreclosure or Cancellation of Debt: If you lost your home to a foreclosure, short sale, or voluntary reconveyance, you will have to report both the sale of the home and cancellation of debt (COD) income. However, you may be able to exclude the gain and the COD income under provisions of the tax code. The lender may issue either a Form 1099-A or 1099-C or both. These forms should be retained as they include valuable information needed to report the transaction and exclude debt relief income. It may also be appropriate to contact this office in advance to determine exactly what additional information must be assembled in order to complete your return.

If you had credit card debt discharged, the amount discharged is taxable income and you will receive a 1009-C. If, at the time the debt was forgiven, you were insolvent (where your liabilities were more than your assets), you will be able to exclude the debt relief income to the extent your liabilities exceeded your assets. Please call the office in advance of your appointment to determine what information will be needed.

2012 Standard Mileage Rates Announced

The Internal Revenue Service has issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes.

Beginning on January 1, 2012, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:

• 55.5 cents per mile for business miles driven (includes a 23 cents per mile allocation for depreciation);

• 23 cents per mile driven for medical or moving purposes; and

• 14 cents per mile driven in service of charitable organizations.

The new rate for business miles is the same as the rate for the second half of 2011, while the rate for medical and moving miles is down a half-cent from the July through December 2011 rate.

The standard mileage rates for business, medical, and moving uses are based on an annual study of the fixed and variable costs of operating an automobile that is conducted by an independent contractor for the IRS.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously (i.e., a fleet).

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

For Other Important Tax Dates Read Our List of Dates You Should Know

January 2012 Taxes Individual Due Dates

January 3– Time to Call For Your Tax Appointment

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January is the beginning of tax season. If you have not made an appointment to have your taxes prepared, we encourage you do so before the calendar becomes too crowded.

January 10 – Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during December, you are required to report them to your employer on IRS Form 4070 no later than January 10.

January 17 – Individual Estimated Tax Payment Due

It’s time to make your fourth quarter estimated tax installment payment for the 2011 tax year. Generally, this due date is January 15, but when the due date falls on a Saturday, Sunday or federal legal holiday, it is not due until the next business day.

January 17 – Farmers & Fishermen Estimated Tax Payment Due

If you are a farmer or fisherman whose gross income for 2010 or 2011 is two-thirds from farming or fishing, it is time to pay your estimated tax for 2011 using Form 1040-ES. You have until April 17, 2012 to file your 2011 income tax return (Form 1040). Generally, this due date is January 15, but when the due date falls on a Saturday, Sunday or federal legal holiday, it is not due until the next business day. If you do not pay your estimated tax by January 17, you must file your 2011 return and pay any tax due by March 1, 2012 to avoid an estimated tax penalty.

January 31 – File 2011 Return to Avoid Penalty for Not Making 4th Quarter Estimated Payments File 2011

Return to Avoid Penalty for Not Making 4th Quarter Estimated Payment If you file your prior year’s return and pay any tax due by this date, you need not make the 4th Quarter Estimated Tax Payment (January calendar).

January 2012 Business Due Dates

January 17 – Employer’s Monthly Deposit Due

If you are an employer and the monthly deposit rules apply, January 17 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for December 2011. This is also the due date for the nonpayroll withholding deposit for December 2011 if the monthly deposit rule applies. Generally, this due date is January 15, but when the due date falls on a Saturday, Sunday or federal legal holiday, it is not due until the next business day. As of 1/1/11, federal employment tax deposits must be made electronically (no more paper coupons), except employers with a deposit liability under $2,500 for a return period may remit payments quarterly or annually with the return.

January 31 – 1099s Due To Service Providers

If you are a business or rental property owner and paid $600 or more for the services of individuals (other than employees) during a tax year, you are required to provide Form 1099 to those workers by January 31st. “Services” can mean everything from labor, professional fees and materials, to rents on property. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2012 (April 2, 2012 if filed electronically). They must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. Please call this office for preparation assistance.

Payments that may be covered include the following:

• Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish

• Compensation for workers who are not considered employees (including fishing boat proceeds to crew members)

• Dividends and other corporate distributions

• Interest

• Amounts paid in real estate transactions

• Rent

• Royalties

• Amounts paid in broker and barter exchange transactions

• Payments to attorneys

• Payments of Indian gaming profits to tribal members

• Profit-sharing distributions

• Retirement plan distributions

• Original issue discount

• Prizes and awards

• Medical and health care payments

• Debt cancellation (treated as payment to debtor)

January 31 – W-2 Due to All Employees

All employers need to give copies of the W-2 form for 2011 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting.

January 31 – File Form 941 and Deposit Any Undeposited Tax

File Form 941 for the fourth quarter of 2011. Deposit any undeposited Social Security, Medicare and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.

January 31 – Certain Small Employers

File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2011. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more for 2011 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return.

January 31 – File Form 943

All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2011. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

January 31 – W-2G Due from Payers of Gambling Winnings

If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2011.

January 31 – File Form 940

Federal Unemployment Tax File Form 940 (or 940-EZ) for 2011. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.

January 31 – File Form 945

File Form 945 to report income tax withheld for 2011 on all non-payroll items, including back-up withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

It’s Time for Year-End Tax Planning

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Regardless of what Congress does late this year or early next, solid tax savings can  be realized by taking advantage of tax breaks that are on the books for 2011. For individuals, these include:

• the option to deduct state and local sales and use taxes instead of state and local income taxes;
• the above-the-line deduction for qualified higher education expenses; and
• tax-free distributions by those age 70-1/2 or older from IRAs for charitable purposes.

For businesses, tax breaks available through the end of this year that may not be around next year unless Congress acts include:

• 100% bonus first-year depreciation for most new machinery, equipment and software;
• an extraordinarily high $500,000 Section 179 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property); and
• the research tax credit.

Not all actions will apply to your particular situation, but you will likely benefit from many of them. There also may be additional strategies that will apply to your particular tax situation. We can narrow down the specific actions that you can take once we meet with you. In the meantime, please review this list and contact us at your earliest convenience so we can advise you on which tax-saving moves to make.

Year-End Tax Planning Moves for Individuals

Be Aware of the Alternative Minimum Tax (AMT) – Keep in mind when considering year-end tax strategies that many of the tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, these deductions should not be accelerated. This office has tax planning software that can analyze and minimize the effects of the AMT.

Employer Flexible Spending Accounts – If you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. Keep in mind, however, that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs.

Health Savings Accounts – If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2011.

Capital Gains and Losses – We can employ a number of strategies to suit your specific tax circumstances. For example, some taxpayers may be in the zero percent capital gains bracket and should be looking for gains that benefit from no tax. Others may be affected by the wash sale rules when they are trying to achieve deductible losses while maintaining their investment position. Generally, portfolios should be reviewed near year’s end with an eye to minimizing gains and maximizing deductible losses. It may be appropriate for you to call for a year-end strategy appointment to discuss trades and actions that can produce tax benefits for you.

Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting your traditional IRA into a Roth IRA. Even if your income is at your normal level, with the recent decline in the stock markets, the current value of your Traditional IRA may be low, which provides you an opportunity to convert it into a Roth IRA at a lower tax amount. Thereafter, future increases in value would be tax-free when you retire.

Recharacterizing a Roth Conversion – If you converted assets in a traditional IRA to a Roth IRA earlier in the year, you may have seen the assets decline in value due to the recent market decline, and you will end up paying higher than necessary taxes on that higher valuation. However, you may undo that rollover by recharacterizing the conversion by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later (generally after 30 days) reconvert to a Roth IRA.

IRA to Charity Transfer – This year may well be the last chance for taxpayers ages 70-1/2 or older to take advantage of an up-to-$100,000 annual exclusion from gross income for otherwise taxable individual retirement account (IRA) distributions that are qualified charitable distributions. Such distributions aren’t subject to the charitable contribution percentage limits and can’t be included in gross income. However, the contribution isn’t deductible.

Advance Charitable Deductions – If you regularly tithe at a house of worship, you might consider pre-paying part or all of your 2012 tithing and thus advancing the deduction into 2011. This can be especially helpful to individuals who marginally itemize their deductions, allowing them to itemize in one year and then take the standard deduction in the next.

Income Deferral – Depending upon your particular tax circumstances, it may be appropriate to defer income into 2012 if possible. For example, if you are receiving an employee bonus, you might ask your employer to defer it until 2012.

Income Acceleration – If your taxable income is unusually low because of lower income or larger deductions, you may be able to absorb additional income with no or minimal additional tax. In that case, you should consider accelerating income when possible without incurring penalties. This would include pension plan and IRA distributions and accelerated capital gains.

Prepay Tax Deductible Expenses – Consider prepaying tax-deductible expenses to increase your 2011 itemized deductions. For example, if you have outstanding dental bills, paying the balance before year-end may be beneficial, but only if you already meet the 7.5% of AGI floor for deducting medical expenses, or if adding the dental payments would put you over the 7.5% threshold. You can even use a credit card to prepay the expenses, but you would only want to do so if the interest expense you’d incur is less than the tax savings.

Prepay State Income Taxes – State income taxes paid during the year are deductible as an itemized deduction. As long as pre-paying the state taxes does not create an AMT problem and you expect to owe state and local income taxes next year, it may be appropriate to increase your withholding at your employment or make an estimated tax payment before the close of 2011, thereby advancing the deduction into this year.

Avoid Underpayment Penalties – If you are going to owe taxes for 2011, you can take steps before year-end to avoid or minimize the underpayment penalty. The penalty is applied quarterly, so making a fourth quarter estimate will not reduce the penalties applied to the first three quarters of the year. However, withholding is treated as paid ratably throughout the year, so increasing withholding at the end of the year can reduce the penalties for the earlier quarters. This can be accomplished with cooperative employers or by taking a non-qualified distribution from a pension plan, which will be subject to a 20% withholding, and then returning the gross amount of the distribution to the plan within the 60-day statutory limit. Please consult this office to determine if you will be subject to underpayment penalties (there are exceptions), and if so, the best strategy to avoid or minimize them.

Sales Tax – Without a congressional extension, 2011 is the final year in which you can elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. You may wish to accelerate big-ticket purchases into 2011 to assure yourself a deduction for sales taxes on the purchases, assuming the increased sales tax deduction is greater than the state and local tax amount. The deduction is extremely helpful in states with no state income tax.

Home Energy Credits – If you are a homeowner, making energy-saving improvements to your residence such as putting in extra insulation or installing energy saving windows and energy efficient heaters or air conditioners may qualify you for a tax credit, if the assets are installed in your home before 2012. The credit is 10% of the cost of the improvement with a cap of $500; the credit is reduced by any credit claimed in prior years for the purchase of other energy-saving property.

Education Credits and Deductions – If someone in your family is attending college and qualifies for an education credit, you can pre-pay the first three months of 2012’s tuition to reach the maximum credit for 2011. In addition, unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses expires after 2011. Thus, prepaying the first three months of 2012’s eligible expenses will increase your deduction for qualified higher education expenses.

Acquire Qualified Small Business Stock (QSBS) – If you have the opportunity, you may wish to acquire QSBS before the close of the year. Doing so won’t save taxes for 2011, but could benefit you in the future. A special provision of the tax code eliminates any tax from sale of QSBS if it is purchased after September 27, 2010 and before January 1, 2012, and is held for more than five years. In addition, such sales won’t cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less. There are some other technical requirements, so call this office for additional details.

Don’t Forget Your Minimum Required Distribution – If you have reached age 70-1/2, you are required to make minimum distributions (RMDs) from your IRA, 401(k) plan and other employer-sponsored retirement plans. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2011, you can delay the first required distribution to the first quarter of 2012, but if you do, you will have to take a double distribution in 2012. Consider carefully the tax impact of a double distribution in 2012 versus a distribution in both this year and next.

Take Advantage of the Annual Gift Tax Exemption – You can give $13,000 in 2011 to each of an unlimited number of individuals, but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes when income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for Businesses & Business Owners

Expensing Allowance (Sec 179 Deduction) – Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000, and the investment ceiling limit is $2,000,000. Without Congressional intervention, these limits are scheduled for a significant drop in 2012. That means that businesses that make timely purchases will be able to currently deduct most, if not all, of the outlays for machinery and equipment. Additionally, for 2011, the expensing deduction applies to certain qualified real property such as leasehold improvements, restaurant, and retail property.

100% First-year Depreciation – Businesses also should consider making expenditures that qualify for 100% bonus first-year depreciation if the property is bought and placed in service this year. This 100% first-year write-off rate drops to 50% next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or next should try to accelerate their buying plans if doing so makes sound business sense.

Work Opportunity Tax Credit (WOTC) – Take advantage of the WOTC by hiring qualifying workers, such as qualifying veterans, before the end of 2011. Unless extended by Congress, the WOTC won’t be available for workers hired after this year.

Research Credit – Make qualified research expenses before the end of 2011 to claim a research credit, which won’t be available for post-2011 expenditures unless Congress extends the credit.

Self-employed Retirement Plans – If you are self-employed and haven’t done so yet, you may wish to establish a self-employed retirement plan. Certain types of plans must be established before the end of the year to make you eligible to deduct contributions made to the plan for 2011, even if the contributions aren’t made until 2012. You may also qualify for the pension start-up credit.

Increase Basis – If you own an interest in a partnership or S corporation that is going to show a loss in 2011, you may need to increase your basis in the entity so you can deduct the loss, which is limited to your basis in the entity.

These are just some of the year-end steps that can be taken to save taxes. You are encouraged to contact this office so a plan can be tailored to meet your specific tax and financial circumstances.

Business Benefits Abound This Year

There are an abundant number of provisions that provide tax relief to small businesses this year.  Just so that you don’t overlook any of these benefits, or in case your business would like to position itself to take advantage of some before the close of the year, here is a brief rundown on many of the business benefits that are available for 2011.  Some of these provisions are currently set to expire after December 31, 2011.

o    Research Tax Credit – A tax credit of up to 20% of qualified expenditures for businesses that develop, design, or improve products, processes, techniques, formulas, or software or perform similar activities.  The credit is calculated on the basis of increases in research activities and expenditures.

• Work Opportunity Tax Credit – A tax credit of up to 40% based upon a portion of the first-year wages paid to members of certain targeted groups.  The credit is generally capped at $6,000 per employee ($12,000 for qualified veterans and $3,000 for qualified summer youth employees).
• Differential Wage Payment Credit – Employers who have an average of less than 50 employees during the year and who pay differential wages to employees for the periods they were called to active duty in the U.S. military can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year.
• New Energy Efficient Home Credit – An eligible contractor can claim a credit of $2,000 or $1,000 for each qualified new energy efficient home either constructed by the contractor or acquired by a person from the contractor for use as a residence during the tax year.
• 100% Bonus Depreciation – Businesses are allowed a 100% bonus depreciation on qualified business property purchased and placed into service during the year.   This generally includes machinery, equipment, computers, qualified leasehold improvements, etc. (but see limitations on vehicles).
• Expensing Allowance – In lieu of depreciating the cost of new assets, a business is allowed to deduct up to $500,000 expensed under Code Sec. 179.  The $500,000 maximum amount is generally reduced dollar-for-dollar by the amount of Section 179 property placed in service during the tax year in excess of $2,000,000.
• 15-year Write-off for Specialized Realty Assets – Qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service during the year are eligible for a 15-year depreciation write-off instead of the normal 39 years.

• HIRE Retention Credit – In 2010, employers were granted a payroll tax holiday for hiring long-term unemployed individuals.  As an incentive to retain those individuals, a non-refundable credit up to $1,000 per employee is allowed to employers who kept those employees on payroll for a continuous 52 weeks.  The credit is limited to 6.2% of the employee’s wages, and will be claimed on the 2011 return.

• Business Autos – As part of the benefit of the 100% depreciation, the first-year luxury auto limit is increased to $11,060 for autos and $11,260 for light trucks and vans.  For vehicles with a gross vehicle rating of over 6,000 pounds, the luxury auto limits do apply and are subject to the full benefit of the 100% bonus depreciation.
• Domestic Production Deduction – This deduction was created to encourage manufacturing and production within the U.S. and provides a deduction equal to 9% of the lesser of net income from qualified production activities or 50% of the W-2 wages paid to employees allocated to the domestic production activity. 

Withholding Compliance Questions & Answers

Q1: In the past, as an employer, I was required to submit all Forms W-4 that claimed complete exemption from withholding (when $200 or more in weekly wages were regularly expected) or claimed more than 10 allowances. What Forms W-4 do I now have to submit to the IRS?
A1: Employers are no longer required to routinely submit Forms W-4 to the IRS.  However, in certain circumstances, the IRS may direct you to submit copies of Forms W-4 for certain employees in order to ensure that the employees have adequate withholding. You are now required to submit the Forms W-4 to IRS only if directed to do so in a written notice or pursuant to specified criteria set forth in future published guidance.

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Q2: If an employer no longer has to submit Forms W-4 claiming complete exemption from withholding or claiming more than 10 allowances, how does the IRS determine adequate withholding?
A2: The IRS is making more effective use of information contained in its records along with information reported on Form W-2 wage statements to ensure that employees have enough federal income tax withheld.

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Q3: If the IRS determines that an employee does not have enough federal income tax withheld, what will an employer be asked to do?
A3: If the IRS determines that an employee does not have enough withholding, we will notify you to increase the amount of withholding tax by issuing a “lock-in” letter that specifies the maximum number of withholding allowances permitted for the employee. You will also receive a copy for the employee that identifies the maximum number of withholding exemptions permitted and the process by which the employee can provide additional information to the IRS for purposes of determining the appropriate number of withholding exemptions. If the employee still works for you, you must furnish the employee copy to the employee. If the employee no longer works for you, you must send a written response to the IRS office designated in the lock-in letter indicating that the employee is no longer employed by you. The employee will be given a period of time before the lock-in rate is effective to submit for approval to the IRS a new Form W-4 and a statement supporting the claims made on the Form W-4 that would decrease federal income tax withholding. The employee must send the Form W-4 and statement directly to the IRS office designated on the lock-in letter. You must withhold tax in accordance with the lock-in letter as of the date specified in the lock-in letter, unless otherwise notified by the IRS. You will be required to take this action no sooner than 45 calendar days after the date of the lock-in letter. Once a lock-in rate is effective, an employer can not decrease withholding unless approved by the IRS.

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Q4: As an employer, after I lock in withholding on an employee based on a lock-in letter from the IRS, what do I do if I receive a revised Form W-4 from the employee?
A4: After the receipt of a lock-in letter, you must disregard any Form W-4 that decreases the amount of withholding. The employee must submit for approval to the IRS any new Form W-4 and a statement supporting the claims made on the Form W-4 that would decrease federal income tax withholding. The employee should send the Form W-4 and statement directly to the address on the lock-in letter. The IRS will notify you to withhold at a specific rate if the employee’s request is approved. However, if, at any time, the employee furnishes a Form W-4 that claims a number of withholding allowances less than the maximum number specified in the lock-in letter, the employer must increase withholding by withholding tax based on that Form W-4.

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Q5: As an employer who has received a modification letter (letter 2808C) from the WHC program, do I wait for another 60 days to change the marital status and/or number of allowances per the modification letter?
A5: No, the modifications to the marital status and/or number of allowances become effective at the beginning of the first full pay period after you receive the letter 2808C.

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Q6: I have been directed to lock in an employee’s withholding. What happens if I do not lock in the employee’s withholding as directed?
A6: Those employers who do not follow the IRS lock-in instructions will be liable for paying the additional amount of tax that should have been withheld.

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Q7: Our employees can submit or change their Forms W-4 on line. How can I prevent them from changing their Forms W-4 after they have been locked-in by the IRS?
A7: You will need to block employees who have been locked-in from using an on line Form W-4 system to decrease their withholding.

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Q8:  What should I do if an employee submits a valid Form W-4 that appears to be claiming an incorrect withholding amount?
A8: You should withhold federal income tax based on the allowances claimed on the Form W-4.  But, you should advise the employee that the IRS may review withholding to ensure it is adequate, and that the IRS may direct you, as the employer, to withhold income tax for the employee at a certain rate if the review indicates the employee’s withholding is inadequate. Once this occurs the employee will not be allowed to decrease their withholding unless approved by the IRS.

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Q9: What do I do if an employee hands me a substitute Form W-4 developed by the employee?
A9:  Employers may refuse to accept a substitute form developed by an employee and the employee submitting such a form will be treated as failing to furnish a Form W-4.  In such case, you should inform the employee that you will not accept this form and offer the employee an opportunity to complete an official Form W-4 or a substitute Form W-4 developed by you. Until the employee furnishes a new Form W-4, the employer must withhold from the employee as from a single person claiming no allowances; if, however, a prior Form W-4 is in effect for the employee, the employer must continue to withhold based on the prior Form W-4.  As an employer, a substitute withholding exemption certificate developed by you can be used in lieu of the official Form W-4, if you provide all the tables, instructions, and worksheets contained in the Form W-4 in effect at that time to the employee.

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Q10: What do I do if an employee hands me an official IRS Form W-4 that is clearly altered?
A10: Any alteration of a Form W-4 (e.g. crossed out penalties of perjury statement above the signature) will cause the Form W-4 to be invalid. If an employer receives an invalid Form W-4, the employee will be treated as failing to furnish a Form W-4; the employer must inform the employee that the Form W-4 is invalid, and must request another Form W-4 from the employee. Until the employee furnishes a new Form W-4, the employer must withhold from the employee as from a single person claiming no allowances. If, however, a prior Form W-4 is in effect for the employee, the employer must continue to withhold based on the prior Form W-4.

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Q11: I heard my employer no longer has to routinely submit Forms W-4 to the IRS.  How will this affect me as an employee?
A11: There is no change in the requirement that employees have adequate income tax withholding. The withholding calculator found on www.irs.gov is available to help employees determine the proper amount of federal income tax withholding. Another useful resource, Publication 919, “How Do I Adjust My Tax Withholding?” is available on the IRS Web site or can be obtained by calling 1-800-TAX-FORM (829-3676).  Individuals who do not have sufficient income tax withholding are subject to penalties. The IRS will be making more effective use of information contained in its records along with information reported on Form W-2 wage statements to ensure that employees have enough federal income tax withheld.

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Q12: As an employee, what happens if the IRS determines that I do not have adequate withholding?
A12: The IRS may direct your employer to withhold federal income tax at an increased rate to ensure you have adequate withholding by issuing a lock-in letter. At that point, your employer must disregard any Form W-4 that decreases the amount of withholding. You will receive a copy of the lock-in letter. You will be given a period of time before the lock-in rate is put in effect to submit for approval to the IRS a new Form W-4 and a statement supporting the claims made on the Form W-4 that would decrease your federal income tax withholding. You should send the Form W-4 and statement directly to the address on the lock-in letter. Once a lock-in letter is issued, you will not be allowed to decrease your withholding unless approved by the IRS.

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Q13: What if I don’t want to submit a Form W-4 to my employer?
A13: Your employer is required to withhold income tax from your wages as if you are single with zero allowances if you do not submit a Form W-4.

Page Last Reviewed or Updated: December 16, 2009

From the Internal Revenue Service

Corporate Tax Code Proves Hard to Change

By BINYAMIN APPELBAUM                 

Published: January 27, 2011

WASHINGTON — Large trucking companies paid the government more than 30 percent of their income in 2009. Biotechnology companies paid less than 5 percent.

Such yawning gaps among industries have become a defining feature of the nation’s corporate tax code, an unwieldy accretion of rules and exceptions that amount to a reward for some kinds of businesses and a rebuke for others.

President Obama on Tuesday added his name to the long list of politicians who have called for an overhaul of those rules, so that companies of all kinds pay the federal government a roughly equal share of their annual profits.

“It makes no sense, and it has to change,” Mr. Obama said in his State of the Union address. “Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit. It can be done.”

But recent efforts to rationalize the code all have failed, and some members of both parties express skepticism that this time will be different. The problem, in a nutshell, is that the popular step of lowering taxes for industries like trucking requires the unpopular step of raising taxes for industries like biotech.

The very idea is already drawing howls from the corporate sector.

Moreover, many of the individual exceptions that allow corporations to shield profits from taxation actually enjoy broad popularity, like tax breaks to support domestic manufacturing, low-income housing and green energy.

There is also the chance of political gridlock. Senate Democrats and House Republicans are both holding hearings on tax reform. Both declare the subject a priority. But it is hardly clear that the two parties are talking about the same thing.

Many conservatives want Congress to cut the overall amount collected from corporations to spur economic growth.

Representative Paul D. Ryan, the Wisconsin Republican who gave the party’s response to the president’s State of the Union address on Tuesday night, has proposed eliminating the corporate income tax. Mr. Ryan instead would impose a smaller 8.5 percent tax on business “consumption” — a measure of income that excludes investment, meaning that the government would collect a much smaller share of a much smaller tax base.

Many liberal groups, meanwhile, see increasing corporate taxation by closing loopholes as a relatively painless way to reduce the federal deficit.

“It doesn’t make a lot of sense to say that we’re going to close loopholes and then give all the money back to corporations,” said Steve Wamhoff of Citizens for Tax Justice, a nonprofit group that favors increased corporate taxation. “This would be one deficit reduction measure that would get the most support from the public.”

The United States imposes a top corporate tax rate of 35 percent. It is almost entirely a theoretical exercise. Various government and private studies have found that the average corporation generally pays about 25 percent of its income, thanks to a mix of deductions and ever-more-sophisticated tax avoidance strategies.

Google, saluted by the president on Tuesday as a paragon of American innovation, paid the government 22 percent of its income in 2009, according to its reports. The company reduced its tax bill by more than $1 billion, claiming deductions for research and investment and exploiting a popular corporate strategy by routing a large share of its income through Ireland.

Even more striking are the differences among industries. Aswath Damodaran, a finance professor at New York University who has researched the issue, said young high-tech companies often pay less than 10 percent of income in taxes, while old-line firms like railroads and utilities often pay more than 25 percent.

This inequality is one of the administration’s major arguments for tax reform. But the idea is widely supported by economists and other academics for a different reason — the concern that the current rules encourage companies to make bad choices.

The ability to deduct interest payments, for example, leads companies to borrow more money than they need. The rules governing real estate have long spurred new construction that would not be profitable without tax benefits.

“The tax code makes bad investments into good ones,” Professor Damodaran said. “Changing the tax code is going to create economically better decisions.”

A major stumbling block is that Congress — often at the urging of presidents including Mr. Obama — has regularly tinkered with the tax code to effect policies. On Tuesday, Mr. Obama charged that “a parade of lobbyists has rigged the tax code to benefit particular companies and industries.”

But many of the largest loopholes were designed by the government. A tax break to encourage domestic manufacturing costs will reduce tax collections by $10 billion this year, according to the Office of Management and Budget. Tax breaks to support research will cost about $8 billion. A tax break for companies that invest in low-income housing will cost about $6 billion.

There are some signs that Congress is willing to rethink its ways. Senator Max Baucus, the Montana Democrat who leads the Finance Committee, has been influenced in his thinking by conversations with corporate leaders who told him they would prefer the certainty of a lower tax rate to the uncertain application of various deductions. Mr. Baucus is now holding a series of hearings on the tax code.

Senator Orrin G. Hatch, the ranking Republican on the Finance Committee, said after the State of the Union address that he believed the entire tax code should be cleaned up — in part because many small businesses actually are taxed as individuals.

“The president is right that our nation’s corporate tax rate, the second-highest in the world, is an impediment to economic growth and a significant drag on our economic competitiveness,” Mr. Hatch said in a statement.

Representative Dave Camp, the Michigan Republican who is chairman of the House Ways and Means Committee, is planning a series of hearings on broader tax reform starting Thursday.

But in a sign of the disagreements lurking just beneath the surface, Mr. Camp emphasized that his hearing was focused in part on reducing “the cost burdens of the current code.” He described the president’s proposals as “a few token gestures.” READ CATHERINE RAMPELL’S BLOG “WINNER’S & LOSER’S UNDER THE NEW YORK TAX CODE”

A version of this article appeared in print on January 28, 2011, on page A22 of the New York edition.