Middle Class Tax Relief and Job Creation Act of 2011

Middle Class Tax Relief and Job Creation Act of 201

2011 Tax Year in Review: Doeren Mayhew

2011 Tax Year in Review: Doeren Mayhew

IRS audits of higher income taxpayers increase

Doeren Mayhew

IRS audits of higher income taxpayers increase The IRS audited one in eight individuals with incomes over $1 million in fiscal year (FY) 2011. While the overall audit coverage rate for individuals remained steady at just over one percent, the audit coverage rate for higher-income individuals experienced growth in FY 2011. This trend, however, could be slowed by IRS budget cuts. Congress appropriated $305 million less for the IRS in FY 2012 compared to FY 2011. Higher income Individuals The audit coverage rate for individuals with incomes under $200,000 was 1.04 percent in FY 2010 and fell to 1.02 percent in FY 2011. However, the audit coverage rate for individuals with incomes $200,000 and higher increased from 3.10 percent in FY 2010 to 3.93 percent in FY 2011. Significant gains in audit coverage came in audits of individuals with incomes $1 million or more. The audit coverage rate for those millionaires increased from 8.36 percent in FY 2010 to 12.48 percent in FY 2011. Field audits of individuals with incomes $200,000 and higher increased from 58,521 in FY 2010 to 78,392 in FY 2011. Field audits of individuals with incomes $1 million and higher increased from 16,509 in FY 2010 to 20,475 in FY 2011. Businesses Examinations of business returns in FY 2011 decreased compared to FY 2010. Overall, the IRS examined 9,869,358 business returns (all types of businesses) in FY 2011. That number was 9,941,289 in FY 2010. Corporations.  Corporations with assets $10 million and higher had the highest audit coverage rate at 17.64 percent in FY 2011 (16.58 percent in FY 2010). Within the large corporation category, the audit coverage rate was highest for corporations with assets $250 million or higher, at 27.6 percent for FY 2011. The audit coverage rate for small corporations (corporations with assets under $10 million) was 1.02 percent in FY 2011 compared to 0.94 percent in FY 2010. Partnerships/S Corps.  The audit coverage rate for partnerships in FY 2011 was 0.40 percent, compared to 0.36 percent in FY 2010. The audit coverage rate also increased for S corps (0.42 percent in FY 2011 compared to 0.37 percent in FY 2010). Please feel free to call this office for a more targeted explanation of how these developments may impact your operations. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

Sweeping new IRS 'repair regulations' impact most businesses

Doeren Mayhew

Sweeping new IRS 'repair regulations' impact most businesses The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012. These so-called "repair regulations" are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments. The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers--everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures. Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again. The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations. The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed. Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized. To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition. The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate. Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

Congress begins work on payroll tax extension as White House unveils new proposals

Doeren Mayhew

Congress begins work on payroll tax extension as White House unveils new proposals The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives. Payroll tax cut The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes. Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all. Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more. House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums. One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress. Extenders The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers' classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions. President Obama's FY 2013 proposals President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts. Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama's other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to "insource" jobs at home. On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments. If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

IRS launches third version of voluntary offshore disclosure program

Doeren Mayhew

IRS launches third version of voluntary offshore disclosure program The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program. Previous disclosure programs The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases. Reopened program The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS. The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower. In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty. The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation). The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers. Quiet disclosures One goal of the three programs is to caution taxpayers against so-called "quiet disclosures." A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law. Critics The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate's report. If you have any questions about the reopened offshore voluntary disclosure program, please contact our office. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

Auto/ truck maximum values updated for 2012 cents-per-mile/fleet-average valuation

Doeren Mayhew

Auto/ truck maximum values updated for 2012 cents-per-mile/fleet-average valuation Taxpayers whose employers provide company cars (or trucks and vans) for their personal use must factor that usage into their gross income. Personal use of a vehicle provided by an employer is considered fringe benefit income, and taxpayers generally may calculate its value using the "cents-per-mile" rule outlined by the IRS. (Under this rule, usage in 2012 is equal to 55.5 cents per mile.) Cents-per-mile Valuation In order to use the cents-per-mile valuation rule, the vehicle's fair market value may not exceed a specified dollar amount. The IRS periodically updates this amount to reflect the market, and do so again in mid-January by issuing Rev. Proc. 2012-13. For company cars, trucks, or vans first placed into service in 2012 the amounts have increased. The maximum 2012 FMV amounts for use of the cents-per-mile valuation rule are: $15,900 for a passenger automobile (up from $15,300 in 2011); and $16,700 for a truck or van, including passenger automobiles such as minivans and sport utility vehicles, which are built on a truck chassis (up from $16,200 in 2011). It should be noted that the Rev. Proc. 2012-13 dollar caps apply only to qualifying employer-provided automobiles first made available for personal use in calendar year 2012. Vehicles first used for personal purposes in previous years must use the limits designated by the IRS for those years. Fleet-average Valuation Employers with a fleet of at least 20 automobiles can average the value of its fleet to calculate the fair market value of the automobiles within it. The IRS has also updated the maximum fair market value amounts under which vehicles qualify for the use of the fleet-average valuation rule in 2012. They are $21,100 for a passenger automobile and $21,900 for a truck or van. The fleet-average valuation rule cannot be used if the value of any vehicle in the fleet exceeds these FMVs. Please feel free to call Doeren Mayhew for a more targeted explanation of how these new regulations impact your business operations. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

Tax gap grows to $450 billion; compliance rate holds steady

Doeren Mayhew

Tax gap grows to $450 billion; compliance rate holds steady The "gross tax gap," or the amount of tax owed to the U.S. government that is not paid on time, climbed from $345 billion in Tax Year (TY) 2001 to $450 billion in TY 2006, the IRS has reported. (Because of the time it takes to collect unpaid taxes and to analyze the data, 2006 is the most recent year for which the statistics necessary for the report were available.) The growth in the tax gap over five years was concentrated in underreporting and underpayment, which jointly accounted for nine out of 10 tax gap dollars, according to the agency. The IRS also reported that despite the increase in the tax gap, the voluntary compliance rate for TY 2006 was statistically unchanged from TY 2001. Background The net tax gap, as opposed to the tax gap, is the amount of tax liability that is never collected, even after the IRS completes its enforcement actions. In TY 2001, the gross tax gap was $345 billion and the net tax gap was $290 billion. In TY 2006, the gross tax gap climbed to $450 billion and the net tax gap grew to $385 billion. The IRS reported that enforcement activities and late payments reduced the TY 2006 net tax gap by $65 billion, compared to $55 billion in TY 2001. The overall voluntary compliance rate in TY 2006 was 83.1 percent compared to 83.7 percent in FY 2001. According to the IRS, the two rates are essentially the same because the TY 2006 rate is within the range of error of the TY 2001 rate. Underreporting Underreporting of income remained the largest contributing factor to the tax gap, the IRS explained. Underreporting accounted for an estimated $376 billion (84 percent) of the $450 billion TY 2006 gross tax gap. Underreporting grew 32 percent between TY 2001 and TY 2006, the IRS reported. Individuals. According to the IRS, individuals underreported by an estimated $235 billion in TY 2006 compared to $197 billion in 2001. Corporations.  The IRS estimated that the tax gap for large corporations (assets over $10 million) was $48 billion in TY 2006 and $19 billion for small corporations in TY 2006. Employment taxes.  Underreporting of self-employment taxes contributed $57 billion to the TY 2006 tax gap, the IRS reported. Taxpayers underreported FICA taxes by $14 billion in TY 2006. Nonpayment Nonfiling made up $28 billion of the TY 2006 gross tax gap, the IRS explained. Nonfiling by individuals accounted for nearly 90 percent of all nonfiling in TY 2006. What does the future hold? The IRS did not speculate on what an eventual examination of TY 2011 would reveal another five years from now. However, it did mention the attention that IRS Commissioner Shulman has given to the tax gap since taking office in 2008, emphasizing that virtually all major initiatives launched by the IRS since then "have been designed to focus on the tax gap. Please feel free to call Doeren Mayhew for a more targeted explanation of these issues. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

IRS eliminates tort test for exclusion of personal injury/sickness damages

Doeren Mayhew

IRS eliminates tort test for exclusion of personal injury/sickness damages Recent IRS regulations provide that damages received from a lawsuit or settlement as compensation for personal physical injuries or sickness may be excluded from gross income, even when they were not awarded in an action based on tort or tort-like injuries. The new guidance brings the IRS's official set of regulations up to speed with current law. By statute, as amended in 1996, damages received "on account of personal physical injuries or physical sickness" are expressly excluded from taxable gross income. But courts have also applied a "tort test" that pre-dates the amendment in order to prevent taxpayers from wrongfully excluding damages awarded in breach of contract cases or other cases were the injury was not physical. For example, the U.S. Supreme Court found inUnited States v. Burke, 504 U.S. 229 (1992), that the award of retroactive wages withheld in violation of Title VII was not a tort-like personal injury meriting exclusion of the damages from the plaintiff's income. The Court reasoned that if the employer had paid the wages in the first place, they would have been taxed. The result of the decision had the unfortunate effect of limiting the ability of some taxpayers, whose legal actions were not based in tort, to exclude their damages for physical injuries or sickness. For example, recipients of damages in no-fault cases where the cause of action was not based in tort law were unable to exclude the damages from income. IRS's reasoning The IRS justified removing a "tort test" by finding that case law following U.S. v. Burke and the 1996 amendment to Code Sec. 104(a)(2) had clarified the definition of excluded damages. This eliminated the need for the overly restrictive tort test. The final regulations provide guidance that there needs to be a direct link between the personal injury and the recovery. The IRS's final regulations also reiterated that an exclusion under Code Sec. 104(a)(2) also applies to damages for emotional distress. It further explained that the exclusion applies, even if the damages are not necessarily attributable or related to a physical injury or physical sickness, to the extent that the damages for emotional distress are not in excess of amount paid for medical care related to such emotional distress. Effective date The final regulations apply to damages paid under a written binding agreement, court decree or mediation award entered into or issued after September 13, 1995, and received after January 23, 2012. The IRS advised that taxpayers may apply the final regulations to amounts paid under a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after August 20, 1996, and if otherwise eligible may file a claim for refund for a tax year for which the period of limitation on credit or refund under Code Sec. 6511 has not expired. Please feel free to call this Doeren Mayhew for a more targeted explanation of how these regulations impact your circumstances. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

IRS relief for IRA owners entering into broker indemnification agreements

IRS relief for IRA owners entering into broker indemnification agreements

The IRS is providing temporary relief for owners of individual retirement accounts (IRAs) who have entered into indemnification agreements with brokers that may result in prohibited loan transactions.  The relief is in response to a recent decision by the U.S. Department of Labor (DOL).

DOL opinion

In October 2011, the DOL issued an advisory opinion addressing a scenario where an individual IRA owner entered into an agreement to indemnify a broker against the indebtedness of, or arising from, the individual's IRA with the broker. The advisory opinion asked under what circumstances such an agreement would be an impermissible "extension of credit," under Code Sec. 4975(c)(1)(B) and whether, in such cases, any prohibited transaction would be covered by DOL class exemption PTE 80-26. The advisory opinion concluded that PTE 80-26 does not provide relief for such extensions of credit

In general, Code Sec. 4975(c)(1)(B) prohibits the direct or indirect lending of money or other extension of credit between a plan and a disqualified person. For purposes of the Tax Code, a plan includes an IRA and a disqualified person includes a fiduciary. Also, an IRA owner who self-directs investments attributable to his or her IRA is a fiduciary and subject to Code Sec. 4975.

IRS relief

Pending further action or guidance from the DOL, the IRS announced that it will determine the tax consequences relating to an IRA without taking into account the consequences that might otherwise result from a prohibited transaction under § 4975 resulting from entering into any indemnification agreement or any cross-collateralization agreement similar to those described in DOL Advisory Opinions 2009-03A and 2011-09A. (That is, provided there has been no execution or other enforcement pursuant to the agreement against the assets of an IRA account owned by an individual granting the security interest.)

Ann. 2011-81

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

MI - Filing requirement for federally disregarded entities extended further

MI - Filing requirement for federally disregarded entities extended further The Michigan Department of Treasury has revised a notice stating that while disregarded entities for federal tax purposes are required to file Michigan business tax (MBT) returns, the due date to file the returns is extended to July 1, 2012 (previously, December 31, 2011). The notice was previously reported. Notice to Taxpayers Regarding Federally Disregarded Entities and the Michigan Business Tax, Michigan Department of Treasury, issued November 29, 2010, revised April 30, 2011, revised October 3, 2011, revised again November 15, 2011

If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

 Doeren Mayhew

FAQ: What tax breaks come with raising a child?

Doeren Mayhew FAQ: What tax breaks come with raising a child? Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit. Dependency Exemption In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer's personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year. Child Tax Credit Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50. Child and Dependent Care Credit If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit. Adoption Credit Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000. Higher Education Credits There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds. Extended Health Care Coverage Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption. Child Care Assistance Credit (for businesses) Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility. If you have any questions about these provisions and how they may benefit you, please contact Doeren Mayhew. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

How Do I... Receive my tax refund that the IRS used to offset my spouse's debt?

Doeren Mayhew

How Do I... Receive my tax refund that the IRS used to offset my spouse's debt?

The Treasury Department is authorized to offset a taxpayer's tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

Offset

If an individual owes money to the federal government because of a delinquent debt, the Treasury Department's Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.

A taxpayer's refund may be reduced by FMS and offset to pay:

Past-due child support
Federal agency non-tax debts
State income tax obligations, or
Certain unemployment compensation debts owed a state.
FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer's offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.

Form 8379

If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.

The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.

The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

February 2012 tax compliance calendar

Doeren Mayhew

February 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 February 2012.

February 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25-27.

February 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28-31.

February 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1-3.

February 10

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

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4-7.

February 15

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8-10.

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

February 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11-14.

February 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15-17.

February 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18-21.

February 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22-24.

March 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25-28.

March 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29-March 2.


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.