New Tax on Unearned Income Starts in 2013
Wednesday, August 15, 2012
Wednesday, August 8, 2012
IRS clarifies whistleblower awards
The IRS has issued program manager technical advice (PMTA) explaining that Code Sec. 7623 cannot form the basis for awards related to information provided by whistleblowers that only concerns violations of non-tax law provisions. If, on the other hand, the IRS receives information pertaining to a violation of non-tax law, but which leads to a recovery under Title 26 (the Tax Code), then the IRS may pay an award under Code Sec. 7623.
Code Sec. 7623 authorizes the IRS to pay awards to individual informers (called "whistleblowers") who bring information to the agency's attention that leads to the detection of (1) tax underpayments or (2) violations of the internal revenue laws. Code Sec. 7623 does not define "violations of the internal revenue laws," but the IRS noted that the use of the term throughout the Code, in court opinions, and in other relevant sources indicates that "internal revenue laws" refers to tax laws under Title 26 or its predecessors. Therefore, the IRS may pay awards under Code Sec. 7623, based on a whistleblower's information, only if it recovers amounts related to violations of tax laws. Awards are paid from the proceeds of any amounts (other than interest) collected by reason of the information provided.
The PMTA answers whether Code Sec. 7623 allows for payment of awards for information related to violations of non-Tax Code laws, for example fraud or money laundering or other violations of Titles 18 and 31. The PMTA also answers whether, if the statute does authorize the IRS to pay awards based on either Title 18 or Title 31 violations, amounts collected as a result of such violations would constitute "additional amounts" for purposes of computing collected proceeds under the statute.
The IRS determined that amounts recovered for violations of non-tax laws may not be considered for purposes of computing an award under section 7623. However, information that pertains to non-Tax Code violations-such as those relating to Titles 18 or 31 violations-but which leads to recovered amounts for a violation of tax law may provide the basis of an award under section 7623. In such circumstances, the IRS may pay an award so long as, based on the information provided, the IRS recovers proceeds directly associated with a violation of tax laws.
If, on the other hand, the IRS receives information pertaining to a tax law violation that leads not to a recovery under the Tax Code, but to a recovery for violations of Titles 18 or 31, then the IRS may not pay an award under section 7623.
If you or your clients would like more information relating to whistleblower rewards under the Tax Code, please contact our offices.
Fracking income is qualifying income for publicly traded partnership
In a recent letter ruling, the IRS determined that a publicly traded partnership's (PTP) income from the removal, treatment, recycling, and disposal of waste products from hydraulic fracturing ("fracking") is qualifying income under Code Sec. 7704(d)(1)(E).
"Fracking" is a technique by which fluids are pumped in a gas or oil well at high pressure to fracture geologic formations and open up pathways for the gas or oil to flow up for extraction. Once the injection process is completed, the internal pressure of the rock formation causes fluid to return to the surface through the wellbore. This fluid is known as "flowback."
Tax Code and qualifying income
Under Code Sec. 7704(a), a PTP is treated as a corporation unless the partnership meets the gross income requirements under Code Sec. 7704(c)(2) for the tax year and each preceding tax year beginning after December 31, 1987, during which the partnership or any predecessor was in existence. A partnership meets the gross income requirements for any tax year if 90 percent or more of the gross income of the partnership for the tax year consists of qualifying income.
Qualifying income is generally interest, dividends, real property rents, and gain from the sale or other disposition of real property. Qualifying income includes income or gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource.
The IRS determined that the PTP's income from the removal, treatment, recycling, and disposal of fracturing flowback, produced water, and other residual waste products generated by oil and gas wells during the fracturing process would constitute qualifying income.
The IRS also determined that income derived from the marketing and distribution of salvaged crude oil and the asphalt alternative produced by the PTP-excluding income earned from marketing natural resources to end users at the retail level-would constitute qualifying income.
If you operate within the hydraulic fracturing industry and would like help with these requirements, please contact our office.
Long-term farm workers who lived on-site were employees
The Tax Court found recently that an S corporation had failed to treat two agricultural workers, who lived on the horse farm where they performed their duties, as employees. The court upheld the IRS determination that the S corporation owed employment taxes.
Farm employment tax reporting
Wages paid to farm workers are subject to Social Security and Medicare taxes and federal income tax withholding for any calendar year that the employer either pays an employee cash wages of $150 or more in a year for farm work; or total (cash and noncash) wages paid to all farm workers are $2,500 or more. Employers must report the income tax withheld and Social Security and Medicare taxes on Form 943, Employer's Annual Federal Tax Return for Agricultural Employees.
The S corporation and workers
The S corporation operated a horse farm and engaged the services of two workers, who also lived on the farm. Their duties included cleaning stalls, the barn area, the barn offices, the rest room, and the tack room; grooming horses; watering the horses; and moving the horses between pastures. The tools used to care for the horses and barn were all owned by the taxpayer.
The S corporation paid each worker by check every week. The S corporation also obtained workers' compensation and employer's liability insurance for the two workers.
The court first noted that the term employee, for purposes of employment taxes, includes any individual who, under common law rules, has the status of an employee. The determination of whether an individual is an employee turns on the facts and circumstances of each case. Relevant factors, the court observed, include degree of control exercised by the principal; which party invests in the work facilities used by the worker; opportunity of the individual for profit or loss; whether the principal can discharge the individual; whether the work is part of the principal's regular business; permanency of the relationship; and the type of relationship the parties believed they were creating.
Here, the court found that the S corporation exercised control over the activities of the workers. The S corporation's owner personally supervised the workers. The workers also used equipment provided by the S corp. Moreover, the court observed that the workers resided on the farm in housing provided by the S corp. Because the individuals were long-term workers who actually resided on the farm, the relationship between the workers and the S corporation could not be characterized as transitory or temporary. The court concluded that the relationship between the S corporation and the workers was that of employer and employees.
If you own or operate a farm and have workers on the farm, you can contact this office for assistance on the treatment of your workers.
Twin Rivers Farm, TC Memo. 2012-184
IRS streamlines delinquent return filing procedures for
The IRS recently announced streamlined procedures for U.S. citizens with foreign accounts or who reside in foreign countries. The procedures apply to certain U.S. citizens (and dual citizens) who are nonresidents of the United States and who have failed to file U.S. income tax and information returns, such as Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).
U.S. citizens (even those living abroad) with foreign bank accounts must report them to the IRS. The guidance does not represent a change in the current law, but is mainly a confirmation that the IRS has the right to audit a taxpayer and impose penalties in cases where it believes that the facts warrant such a response. The news may signal that the IRS is backing away from the problematic "one-size-fits-all" approach to foreign taxation and FBAR compliance.
Under the new procedures, qualified nonresidents must submit delinquent tax returns for the past three years; delinquent FBARs for the past six years, and any additional information regarding compliance risk factors required by future instructions. Payment of any federal tax and interest due must accompany the submission, the IRS explained.
Review will be expedited for individuals presenting low compliance risk, and the IRS will not assert penalties or pursue follow-up actions. Submissions presenting higher compliance risk are ineligible for the procedure and will be subject to a more thorough review and possibly a full examination. More details will be released before the procedures are effective September 1, 2012.
Offshore Voluntary Disclosure Initiative (OVDI)
In January 2012, the IRS reopened the OVDI (which had closed in 2011) for taxpayers with foreign accounts who have not reported them to the IRS. The IRS announced that a taxpayer who fails to notify the U.S. Department of Justice of an appeal to a foreign court is ineligible for the OVDI.
Many citizens are tripped up by the requirements to report foreign accounts. If you would like help with these requirements, please contact our office.
President signs transportation act with pension-related tax provisions and more
President Obama signed a comprehensive transportation bill on July 6. The Moving Ahead for Progress in the 21st Century Act (MAP-21) (P.L. 112-141) extends highway excise taxes. Other provisions also provide for pension funding stabilization, enhance the ability of employers to transfer excess pension assets to fund retiree health benefits, provide for phased retirement authority for federal employees, and expand the definition of a tobacco manufacturer to include businesses operating roll-your-own cigarette machines.
The Highway Trust Fund is funded by excise taxes on highway motor fuels, a retail sales tax on heavy highway vehicles, a manufacturers' excise tax on heavy vehicle tires, and an annual use tax on heavy vehicles. Except for 4.3 cents per gallon of the Highway Trust Fund fuels tax rates, the remaining taxes were scheduled to expire after June 30, 2012. MAP-21 extends the taxes dedicated to the Highway Trust Fund through September 30, 2016, and for the heavy vehicle use tax, through September 30, 2017.
Employers maintaining defined benefit plans generally are required to make a minimum contribution for each plan year to fund plan benefits. The minimum funding rules for single-employer defined benefit plans specify the interest rates and other actuarial assumptions that must be used in determining the present value of benefits.
The new law stabilizes the interest rate formula by taking into account average interest rates over the most recent 25 years, which are generally higher than the short-term rates which resulted in inflated pension plan liabilities. Under the new law, plan liabilities continue to be determined based on corporate bond segment rates, which are based on the average interest rates over the preceding two years. However, beginning in 2012 for purposes of the minimum funding rules, any segment rate must be within 10 percent (increasing to 30 percent in 2016 and thereafter) of the average of such segment rates for the 25-year period preceding the current year.
A pension plan may provide medical benefits to retired employees through a separate account that is part of a defined benefit plan. The retiree generally may exclude benefits from his or her gross income. MAP-21 provides for qualified transfers to retiree medical accounts to be made through December 31, 2021. Additionally, MAP-21 allows qualified transfers to be made to fund the purchase of retiree group-term life insurance.
Under phased retirement, a qualified federal employee's work schedule is reduced to a percentage of a full time work schedule and the employee receives a phased retirement annuity. At full-time retirement, the employee receives a composite retirement annuity that also includes the portion of the employee's retirement annuity attributable to the reduced work schedule. MAP-21 provides an exception to the early distribution tax for payments under a phased retirement annuity and a composite retirement annuity.
MAP-21 expands the definition of manufacturer of tobacco products to include any person who for commercial purposes makes available machines capable of making tobacco products for consumer use. This includes making a machine available for consumers to produce tobacco products for personal consumption or use. Under MAP-21, the machine's owner is responsible for federal excise taxes on the tobacco products manufactured using his or her machine. The provision is projected to raise $94 million over 10 years.
If you have any questions about this law, please contact our office.
Moving Ahead for Progress in the 21st Century Act (P.L. 112-141)
Wednesday, August 1, 2012
Prepare to implement important provisions in the Affordable Care Act
When Congress passed the Patient Protection and Affordable Care Act and its companion bill, the Health Care and Education Reconciliation Act (collectively known as the Affordable Care Act) in 2010, lawmakers staggered the effective dates of various provisions. The most well-known provision, the so-called individual mandate, is scheduled to take effect in 2014. A number of other provisions are scheduled to take effect in 2013. All of these require careful planning before their effective dates.
Two important changes to the Medicare tax are scheduled for 2013. For tax years beginning after December 31, 2012, an additional 0.9 percent Medicare tax is imposed on individuals with wages/self-employment income in excess of $200,000 ($250,000 in the case of a joint return and $125,000 in the case of a married taxpayer filing separately). Moreover, and also effective for tax years beginning after December 31, 2012, a 3.8 percent Medicare tax is imposed on the lesser of an individual's net investment income for the tax year or modified adjusted gross income in excess of $200,000 ($250,000 in the case of a joint return and $125,000 in the case of a married taxpayer filing separately).
The Affordable Care Act sets out the basic parameters of the new Medicare taxes but the details will be supplied by the IRS in regulations. To date, the IRS has not issued regulations or other official guidance about the new Medicare taxes (although the IRS did post some general frequently asked questions about the Affordable Care Act's changes to Medicare on its web site). As soon as the IRS issues regulations or other official guidance, our office will advise you. In the meantime, please contact our office if you have any questions about the new Medicare taxes.
Also in 2013, the Affordable Care Act limits annual salary reduction contributions to a health flexible spending arrangement (health FSA) under a cafeteria plan to $2,500. If the plan would allow salary reductions in excess of $2,500, the employee will be subject to tax on distributions from the health FSA. The $2,500 amount will be adjusted for inflation after 2013.
Additionally, the Affordable Care Act also increases the medical expense deduction threshold in 2013. Under current law, the threshold to claim an itemized deduction for unreimbursed medical expenses is 7.5 percent of adjusted gross income. Effective for tax years beginning after December 31, 2012, the threshold will be 10 percent. However, the Affordable Care Act temporarily exempts individuals age 65 and older from the increase.
The Affordable Care Act's individual mandate generally requires individuals to make a shared responsibility payment if they do not carry minimum essential health insurance for themselves and their dependents. The requirement begins in 2014.
To understand who is covered by the individual mandate, it is easier to describe who is excluded. Generally, individuals who have employer-provided health insurance coverage are excluded, so long as that coverage is deemed minimum essential coverage and is affordable. If the coverage is treated as not affordable, the employee could qualify for a tax credit to help offset the cost of coverage. Individuals covered by Medicare and Medicaid also are excluded from the individual mandate. Additionally, undocumented aliens, incarcerated persons, individuals with a religious conscience exemption, and people who have short lapses of minimum essential coverage are excluded from the individual mandate.
The individual mandate was at the heart of the legal challenges to the Affordable Care Act after its passage. These legal challenges reached the U.S. Supreme Court, which in June 2012, held that the individual mandate is a valid exercise of Congress' taxing power.
Like the new Medicare taxes, the Affordable Care Act sets out the parameters of the individual mandate. The IRS is expected to issue regulations and other official guidance before 2014. Our office will keep you posted of developments.
2014 will also bring a new shared responsibility payment for employers. Large employers (generally employers with 50 or more full-time employees but subject to certain limitations) will be liable for a penalty if they fail to offer employees the opportunity to enroll in minimum essential coverage. Large employers may also be subject to a penalty if they offer coverage but one or more employees receive a premium assistance tax credit.
The employer shared responsibility payment provisions are among the most complex in the Affordable Care Act. The IRS has requested comments from employers on how to implement the provisions. In good news for employers, the IRS has indicated may develop a safe harbor to help clarify who is a full-time employee for purposes of the employer shared responsibility payment.
Deducting computer software and development costs
The tax treatment of computer software can be a confusing area. Computer software is an intangible product itself, but it can be acquired in a variety of ways. It may be bundled with a computer processor (hardware), sold on a disc as computer software, downloaded over the Internet, accessed (but not downloaded) over the Internet, or developed by the taxpayer. It may be acquired by itself, or as part of a business. Thus, the treatment of computer software can vary, depending on the circumstances. I
n view of these variations, it is important to get proper advice as to the tax treatment of computer software.
Computer software is treated as an intangible under Code Sec. 197 if it is acquired as part of the acquisition of the assets of a trade or business. In this situation, the software must be amortized over 15 years, a fairly long period. However, if the software is stated and sold separately, not as part of a business acquisition, it can be amortized on a straight-line basis over 36 months. Off-the-shelf computer software can also qualify for Code Sec. 179 small business expensing if it is placed in service in a tax year beginning in 2012. (Code Sec. 179 expensing generally is reserved for tangible personal property.)
Bundled software that is included in computer hardware must be capitalized and depreciated over the life of the hardware, generally five years for computers. If the software is leased or licensed, it may be deducted under Code Sec. 162. If the taxpayer prepays for several years use of the software, the payments must be deducted ratably over the period of use.
Software that is developed by the taxpayer is treated like other research expenditures. It may be deductible over Code Sec. 174(a) as expenses are paid. The taxpayer may instead elect to capitalize the cost of the software under Code Sec. 174(b) and to amortize the costs over 60 months, beginning at the time the software is completed. Finally, the taxpayer could amortize the software over 36 months, beginning after the software is placed in service.
Finally, there also are rules for enterprise research planning (ERP) software. ERP software is a shell that integrates different software modules for financial accounting, inventory control, sales and distribution, production, and human resources. Until the IRS issues regulations on ERP software, taxpayers have relied on a 2002 IRS letter ruling, providing that:
- The cost of purchased ERP software is amortized ratably over 36 months under Code Sec. 167(f);
- Training and related costs under a consulting contract are deductible as current expenses;
- Separately stated computer hardware costs are depreciated as five-year MACRS property ("qualified technological equipment");
- The costs of writing machine-readable code software are treated as developed software and may be deducted currently, like research and development expenditures; and
- The costs of option selection, implementation of ERP templates, and costs of software modeling and design are treated as installation/modification costs and are amortized over 36 months as part of the purchased ERP software.
The domestic production activities deduction under Code Sec. 199 is an additional nine percent deduction from income that is based on the amount of the taxpayer's qualified production activities income (QPAI). QPAI includes receipts for the lease, license, sale or disposition of an item, including computer software that is sold through a disc or download. However, QPAI generally does not include income from the provision of online services for the use of computer software, because there is no disposition of a product.
Timing gains and losses: selloff before rising rates
In 2012, many taxpayers will have additional considerations when analyzing whether to sell investments before the end of the year or retain them in 2013. First, the Bush-era tax cuts are scheduled to expire at the end of 2012. This affects ordinary income rates, as well as rates on capital gains and dividends. Second, under the health care law, a new 3.8 percent Medicare tax on unearned income, including interest, dividends and capital gains, will take effect in 2013. Together, these real and potential changes may add up to hefty new taxes in 2013, unless Congress takes action otherwise.
Income tax rates
Current income tax rates continue through the end of 2012. These include the overall individual income tax rates, currently at 10, 15, 25, 28, 33 and 35 percent. If Congress does not take any action, these rates revert to the higher rates that used to apply: 15, 28, 31, 36, and 39.6 percent. Republicans favor retaining all of the Bush-era rates. President Obama and many Democrats support retaining the 10, 15, 25, and 28 percent rates for lower- and middle-income taxpayers, while reinstating the 36 and 39.6 percent rates for taxpayers with income over $200,000 (single taxpayers) or $250,000 for joint filers.
Additionally, there are calls for tax reform and for an overall lowering of income tax rates, in exchange for ending unspecified tax deductions and benefits. For example, House Republicans have called for replacing current income tax rates with two brackets, of 10 and 25 percent.
Capital gains and dividends
Current income tax rates that extend through the end of 2012 also include the 15 percent rate on capital gains and qualified dividends for qualified taxpayers. If Congress does not act, these rates revert to much higher ordinary income rates, in the case of dividends, and to the 20 percent rate that formerly applied to capital gains. Again, the President and the Republicans would both extend the current rates, but disagree on whether to apply the extensions to all taxpayers (the Republicans) or only to lower- and middle-income taxpayers under the $200,000/$250,000 thresholds (the President).
3.8 percent tax
Adding to the mix is the impending 3.8 percent tax on unearned income. Under the health care law, this tax will apply to 2013 income (and beyond) of single taxpayers with income exceeding $200,000 and joint filers with income exceeding $250,000. The tax is imposed on the lesser of net investment income or the excess of adjusted gross income about the $200,000/$250,000 thresholds.
Net investment income also includes rents, royalties, gain from disposing of property used in a passive activity, and income from a trade or business that is a passive activity. The tax does not apply to distributions from retirement plans and IRAs. Taxpayers cannot necessarily avoid the tax by moving assets to a trust, because the tax will apply if trust income exceeds a threshold currently set at only $11,200.
Sell or hold
Generally, taxpayers should make investment decisions based on economics, holding on to a "good" investment and selling a "bad" investment. This involves looking at past performance and perhaps gazing into a crystal ball. Taxpayers that are debating whether to sell appreciated assets or assets that pay qualified dividends may want to act in 2012, when income tax rates are lower and before the 3.8 percent tax takes effect. Taxpayers considering the sale of declining assets may want to consider holding off until 2013, when losses can offset more highly-taxed gains and reduce the income potentially subject to the 3.8 percent tax.
Because the 3.8 percent tax does not apply to tax-free income, such as municipal bonds and distributions from a Roth IRA, taxpayers may want to shift some of their investments to yield nontaxable income. While the income from converting a traditional IRA to a Roth IRA would be included in the income calculations, qualifying distributions after the conversion would not be included.
Again, the decision must make economic sense. If the taxpayer expects an asset to continue to decline in value during 2012, he or she should sell the asset soon and not wait until 2013. Another consideration is the bunching of income. Taxpayers that sell substantial capital gains assets in 2013 may push their income up to the $200,000/$250,000 thresholds that trigger higher taxes. If the taxpayer is considering a sell-off of assets, it may make more sense to sell assets before 2013.
If a taxpayer wants to shift to more conservative investments, income yields may decline, but so will the incidence of the dividend, capital gains, and unearned income taxes described above. On the other hand, taxpayers looking at more speculative investments should understand that a successful investment may generate income taxed at higher rates in 2013.
Please contact our office if you have any questions.
How do I? Make a Section 83(b) stock election
Stock is a popular and valuable compensation tool for employers and employees. Employees are encouraged to stay with the company and to work harder, to enhance the value of the stock they will earn. Employers do not have to make a cash outlay to provide the compensation, yet they still are entitled to a tax deduction.
Employers may make a direct transfer of stock to an employee as compensation for services performed. In the simplest case, the employee's rights in the stock are vested upon receipt. Under Code Sec. 83, the employee has income, equal to the fair market value of the stock, less any amount paid for the stock. The employer can take a compensation deduction under Code Sec. 162 for the amount included in the employee's income.
Risk of forfeiture
The employer may decide to impose certain conditions on the employee's right to the stock (such as a requirement that the employee continue to work for the company for two years before the stock "vests"). In this situation, the stock is subject to a substantial risk of forfeiture (or is "nonvested") until the two-year period elapses. After two years, the stock vests, and the employee recognizes income for the excess of the stock's value (at the time of vesting) over the amount paid. If the employee leaves the company within two years, the employee forfeits the stock.
An employee who receives stock subject to a substantial risk of forfeiture may anticipate that he or she will stay with the company for the required two years. The employee may also anticipate (or at least hope) that the stock will appreciate in value. Rather than wait two years and have to recognize income when the stock vests, an employee may elect under Code Sec. 83(b) to treat the property as vested upon receipt and to recognize compensation income (if any) at the time of receipt.
The employee may be required to pay for the stock when received. If the employee paid the fair market value of the stock, making a Code Sec. 83(b) election is particularly advantageous, because the employee will not recognize any income on the election.
Example. Widget Corporation transfers 10 shares of its common stock to Hal, an employee, subject to a requirement that Hal work for two years before the stock vests. The stock is worth $5 a share. Hal is required to pay $5 a share upon receipt of the stock. By making a Code Sec. 83(b) election, Hal will not recognize any income, because the value and the cost of the stock are the same. If Hal did not have to pay any money for the shares, and made an election, Hal would have $50 of compensation income (10 shares times $5 a share).
After making an election, if the employee then works for two years, and the stock appreciates, the employee does not recognize any further compensation income, because the employee has already been taxed under Code Sec. 83. By making the election, the employee is treated as owning the stock. When the employee sells the stock, the employee will recognize capital gain or loss, measured by the difference between the amount received and the value of the stock when it vested.
To make an election under Code Sec. 83(b), an employee must file a statement with the IRS, within 30 days of the transfer of the property to the employee. The statement must be filed with the Internal Revenue Service Center where the employee would file his or her income tax return. A copy of the statement must be provided to the employer, who is entitled to a compensation deduction when the election is made. A copy must also be attached to the employee's income tax return.
IRS regulations prescribe the requirements for an election. In Rev. Proc. 2012-29, the IRS also provided sample language for employees to use to make the election. The IRS advised that the sample language is not required. The election must identify the taxpayer, the property being transferred, the date of the transfer, the restrictions on the property, the property's value at the time of transfer (generally determined without the restrictions), the amount paid by the employee, and the amount of compensation income (the value minus the amount paid). The employee must also sign the election.
The election cannot be revoked without the IRS's consent. The IRS will not ordinarily grant consent unless there has been a mistake of fact as to the underlying transaction.
If you have any questions about making a Code Sec. 83(b) election, please contact our office.
FAQ: Should I be paying estimated tax or having more withheld instead?
Some individuals must pay estimated taxes or face a penalty in the form of interest on the amount underpaid. Self-employed persons, retirees, and nonworking individuals most often must pay estimated taxes to avoid the penalty. But an employee may need to pay them if the amount of tax withheld from wages is insufficient to cover the tax owed on other income. The potential tax owed on investment income also may increase the need for paying estimated tax, even among wage earners.
The trick with estimated taxes is to pay a sufficient amount of estimated tax to avoid a penalty but not to overpay. The IRS will refund the overpayment when you file your return, but it will not pay interest on it. In other words, by overpaying tax to the IRS, you are in essence choosing to give the government an interest-free loan rather than invest your money somewhere else and make a profit.
When do I make estimated tax payments?
Individual estimated tax payments are generally made in four installments accompanying a completed Form 1040-ES, Estimated Tax for Individuals. For the typical individual who uses a calendar tax year, payments generally are due on April 15, June 15, and September 15 of the tax year, and January 15 of the following year (or the following business day when it falls on a weekend or other holiday).
Am I required to make estimated tax payments?
Generally, you must pay estimated taxes in 2012 if (1) you expect to owe at least $1,000 in tax after subtracting tax withholding (if you have any) and (2) you expect your withholding and credits to be less than the smaller of 90 percent of your 2012 taxes or 100 percent of the tax on your 2011 return. There are special rules for higher income individuals.
Usually, there is no penalty if your estimated tax payments plus other tax payments, such as wage withholding, equal either 100 percent of your prior year's tax liability or 90 percent of your current year's tax liability. However, if your adjusted gross income for your prior year exceeded $150,000, you must pay either 110 percent of the prior year tax or 90 percent of the current year tax to avoid the estimated tax penalty. For married filing separately, the higher payments apply at $75,000.
Estimated tax is not limited to income tax. In figuring your installments, you must also take into account other taxes such as the alternative minimum tax, penalties for early withdrawals from an IRA or other retirement plan, and self-employment tax, which is the equivalent of Social Security taxes for the self-employed.
Suppose I owe only a relatively small amount of tax?
There is no penalty if the tax underpayment for the year is less than $1,000. However, once an underpayment exceeds $1,000, the penalty applies to the full amount of the underpayment.
What if I realize I have miscalculated my tax before the year ends?
An employee may be able to avoid the penalty by getting the employer to increase withholding in an amount needed to cover the shortfall. The IRS will treat the withheld tax as being paid proportionately over the course of the year, even though a greater amount was withheld at year-end. The proportionate treatment could prevent penalties on installments paid earlier in the year.
What else can I do?
If you receive income unevenly over the course of the year, you may benefit from using the annualized income installment method of paying estimated tax. Under this method, your adjusted gross income, self-employment income and alternative minimum taxable income at the end of each quarterly tax payment period are projected forward for the entire year. Estimated tax is paid based on these annualized amounts if the payment is lower than the regular estimated payment. Any decrease in the amount of an estimated tax payment caused by using the annualized installment method must be added back to the next regular estimated tax payment.
Determining estimated taxes can be complicated, but the penalty can be avoided with proper attention. This office stands ready to assist you with this determination. Please contact us if we can help you determine whether you owe estimated taxes.
|Doeren Mayhew |
August 2012 tax compliance calendar
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 25-27.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 28-31.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 1-3.
Employees who work for tips. Employees who received $20 or more in tips during July must report them to their employer using Form 4070.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 4-7.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 8-10.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 11-14.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 15-17.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 18-21.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 22-24.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 25-28.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 29-31.
Contact Doeren Mayhew, a Michigan Tax and Accounting agency, for more information.