Doeren Mayhew Blog Spot

Wednesday, March 30, 2011

Doeren Mayhew: Retirement and Benefit Plan Changes

Doeren Mayhew: Retirement and Benefit Plan Changes

See original PDF at Doeren Mayhew

Tuesday, March 22, 2011

Court upholds strict certification for Work Opportunity Tax Credit

A federal appeals court has found an employer cannot claim the Work Opportunity Credit (WOTC) for employees who were eventually denied certification by a state employment agency. Merely applying for certification was insufficient to claim the credit. Certification required an affirmative act by the state employment agency.

WOTC

The WOTC is a federal tax credit that rewards private-sector businesses for hiring individuals from target groups, such as certain individuals receiving government assistance, veterans and others. Participating employers can reduce their federal income tax liability. A tax credit of up to 40 percent of the first $6,000, or up to $2,400, in wages paid during the first 12 months for each new hire. Employers must submit a special IRS form to their state employment agencies, which, in turn, certify that an individual is a member of a target group.

Certification

In this case, the taxpayer hired individuals who were members of target groups under the WOTC. A state agency certified many of the individuals as members of a targeted group. However, the same state agency also denied many applications for target group status. Undeterred, the taxpayer claimed the WOTC for all of the employees. The taxpayer argued that its applications for certification were sufficient to claim the tax credit. The Court of Appeals for the Federal Circuit disagreed.

Court’s decision

The court found that merely applying for certification was insufficient. Congress intended certification -- not merely application for certification -- to be an integral, rather than optional, part of the statute. Further, the court found that the taxpayer could not challenge the denial of a state certification in a federal tax proceeding.

Certified public accountants and consulting firm located in Troy, Michigan. This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice.

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.

Tuesday, March 1, 2011

Doeren Mayhew: President's FY 2012 proposals: Higher taxes on wealthy, limited tax breaks for businesses

Roadmap

Every federal budget proposal is just that: a proposal, or a list of recommendations from the White House to Congress. Ultimately, it is for Congress to decide whether to fund a particular government program and at what level. The same is true for tax cuts and tax increases. The final budget for FY 2012 will be a compromise. Nonetheless, President Obama's FY 2012 budget is a helpful tool to predict in what direction federal tax policy may move.

Individuals

In his FY 2012 budget, President Obama repeats his call for Congress to end the Bush-era tax cuts for higher-income individuals (which the president generally defines as single individuals with incomes over $200,000 and married couples with incomes over $250,000). The top individual income tax rates would increase to 36 percent and 39.6 percent, respectively, after 2012. For 2011 and 2012, the top two individual income tax rates are 33 percent and 35 percent, respectively. The president also proposes to limit the deductions of higher income individuals.

Additionally, the president wants Congress to extend the reduced tax rates on capital gains and dividends, but not for higher-income individuals. Single individuals with incomes above $200,000 and married couples with incomes above $250,000 would pay capital gains and dividend taxes at 20 percent rather than at 15 percent after 2012.

The president's FY 2012 budget, among other things, also proposes:

An AMT patch (higher exemption amounts and other targeted relief) after 2011;
A permanent American Opportunity Tax Credit (enhanced Hope education tax credit) after 2012;
A permanent enhanced earned income credit;
A new exclusion from income for certain higher education student loan forgiveness;
One-time payments of $250 to Social Security beneficiaries, disabled veterans and others with a corresponding tax credit for retirees who do not receive Social Security; and
A temporary extension of certain tax incentives, such as the state and local sales tax deduction and the higher education tuition deduction, for one year.

Some of the proposals in the president's FY 2012 budget impact how individuals interact with the IRS. Many taxpayers complain that when they call the IRS, the wait times to speak to an IRS representative are so long they hang up. The president proposes to increase the IRS's budget to hire more customer service representatives. The president also proposes to allow the IRS to accept debit and credit card payments directly, thereby enabling taxpayers to avoid third party processing fees.

Businesses

The tax incentives for businesses in the president's FY 2012 budget are generally targeted to specific industries. One popular but temporary business tax incentive would be made permanent. President Obama proposes to extend permanently the research tax credit. The president also proposes to permanently abolish capital gains tax on investments in certain small businesses.

Other business proposals include:

Employer tax credits for creating jobs in newly designated Growth Zones;
Additional tax breaks for investments in energy-efficient property;
More funds for grants in lieu of tax credits for specified energy property;
One-year extensions of some temporary business tax incentives, such as the Indian employment credit and environmental remediation expensing;
Modifying Form 1099 business information reporting; and
Extending and reforming Build America Bonds.

The president's FY 2012 budget does not include a cut in the U.S. corporate tax rate. Any reduction in the U.S. corporate tax rate is likely to come outside the budget process. The president has spoken often in recent weeks about reducing the U.S. corporate tax rate but he wants any reduction to be revenue neutral; that is, the cost of cutting the U.S. corporate tax rate must be paid for. President Obama has discussed closing some unspecific tax loopholes.

IRS operations

President Obama proposes a significant increase in funding for the IRS. Most of the money would go to hiring new revenue officers and boosting enforcement activities. The White House predicts that investing $13 billion in the IRS over the next 10 years will generate an additional $56 billion in additional tax revenue over the same time period.

Estate tax

Late last year, the White House and the GOP agreed on a maximum federal estate tax rate of 35 percent with a $5 million exclusion for 2010, 2011 and 2012. In his FY 2012 budget, the president proposes to return the federal estate tax to its 2009 levels after 2012 (a maximum tax rate of 45 percent and a $3.5 million exclusion). President Obama also proposes to limit the duration of the generation skipping transfer (GST) tax exemption and to make other estate-tax related changes.

Revenue raisers

The White House and Congress are both looking at ways to cut the federal budget deficit. Taxes are one way. The president's FY 2012 budget proposes a number of revenue raisers, especially in the area of international taxation and in fossil fuel production.

International taxation. The president's budget proposes to reduce tax incentives for U.S.-based multinational companies. One goal of this strategy is to encourage multinational companies to invest in job creation in the U.S. The president's FY 2012 budget calls for, among other things, to limit earnings stripping by expatriated entities, to limit income shifting through intangible property transfers, and to make more reforms to the foreign tax credit rules. If enacted, all of the proposed international taxation reforms would raise an estimated $129 billion in additional revenue over 10 years.

LIFO. President Obama proposes to repeal the last-in, first-out (LIFO) inventory accounting method for federal income tax purposes. Taxpayers that currently use the LIFO method would be required to write up their beginning LIFO inventory to its first-in, first-out (FIFO) value in the first tax year beginning after December 31, 2012. This proposal would raise an estimated $52.8 billion over 10 years.

Fossil fuel tax preferences. The Tax Code includes a number of tax incentives for oil, gas and coal producers. President Obama proposes to repeal nearly all of these tax breaks for oil, gas and coal companies. These proposals would raise an estimated $46.1 billion over 10 years.

Financial institutions. President Obama proposes to impose a financial crisis responsibility fee on large U.S. financial institutions. The fee, if enacted, would raise an estimated $30 billion in additional revenue over 10 years.

Carried interest. The president's FY 2012 budget proposes to tax carried interest as ordinary income. This proposal would raise an estimated $14.8 billion in additional revenue over 10 years.

Insurance company reforms. Insurance companies are subject to specific and very technical tax rules. President Obama proposes to overhaul the tax rules for insurance companies. If enacted, these reforms would raise an estimated $14 billion over 10 years.

These are just some of the revenue raisers in the president's FY 2012 budget. All of them will be extensively debated in Congress in the coming months. Our office will keep you posted on developments. If you have any questions about the president's FY 2012 budget proposals, please contact our office.

Certified public accountants and consulting firm located in Troy, Michigan. This data is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional advice.

Doeren Mayhew: IRS launches second offshore voluntary disclosure initiative

In exchange for voluntary disclosure of unreported foreign assets, the IRS is offering taxpayers a second opportunity for reduced penalties. A special offshore voluntary disclosure initiative was announced on February 8, 2011. The initiative is temporary and runs through August 31, 2011.

Offshore accounts

The IRS knows that Americans have undisclosed assets in foreign financial institutions. In some cases, taxpayers may not be aware that federal law requires disclosure of offshore accounts above a certain monetary threshold. In other cases, taxpayers know they must report their offshore assets but choose not to make disclosures.

The U.S. and the IRS are working on several fronts to discover unreported offshore assets. The U.S. is negotiating with so-called tax haven jurisdictions for more transparency in their banking and tax laws. These are countries that traditionally have had tough bank secrecy laws. The U.S. has had some success in this area, most notably in getting one of Switzerland's largest banks to agree to share account information with the IRS. Many experts predict that the U.S. will persuade banks in other countries to share account information with the IRS.

In 2010, Congress passed the Hiring Incentives to Restore Employment (HIRE) Act. The new law requires taxpayers with foreign assets exceeding an aggregate value of $50,000 to report them on information returns. This requirement is in addition to the current filing requirement for Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), which applies when the aggregate value of foreign accounts exceeds $10,000. The IRS is expected to release guidance on the HIRE Act's foreign account reporting rules in 2011.

The IRS has also used a carrot and stick approach to encourage taxpayers to come forward. In 2009, the IRS launched an offshore voluntary disclosure program. According to the IRS more than 15,000 taxpayers participated in the 2009 program. The IRS reported that the 2009 program uncovered undisclosed accounts in more than 60 countries.

2011 initiative

The 2011 voluntary disclosure initiative, like the 2009 program, offers a reduced penalty framework in exchange for voluntary disclosure. In the 2009 program, taxpayers faced up to a 20 percent penalty covering up to a six-year period. The penalty framework for 2011 is higher (at 25 percent for most taxpayers), meaning that taxpayers who did not participate in the 2009 voluntary disclosure program will not be rewarded for waiting.

For the 2011 initiative, the penalty framework requires taxpayers to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Participants also must pay back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Taxpayers participating in the initiative must file all the necessary paperwork and make all required payments with the IRS before August 31, 2011.

Reduced penalties

Some taxpayers may be eligible for a 12.5 or 5 percent penalty under the 2011 initiative. The 12.5 percent penalty applies to taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative. The five percent penalty generally applies to taxpayers who did not open the foreign account and who met other very specific criteria covered by the 2011 initiative. Individuals who are foreign residents and who were unaware they were U.S. citizens may also qualify for the five percent penalty.

How to participate

The first step is to talk to a tax professional. The program is not just for individuals. Entities such as partnerships and trusts can also request to participate. However, certain taxpayers are ineligible. They include taxpayers under examination (whether or not the examination relates to undisclosed foreign assets) and taxpayers under criminal investigation.

The IRS encourages taxpayers to file a pre-clearance request. The IRS will then notify the taxpayer if the taxpayer has been cleared to make a voluntary disclosure. Pre-clearance, however, does not guarantee acceptance into the program, the IRS cautioned. After pre-clearance, taxpayers submit a voluntary disclosure letter. The IRS will review the letter and notify the taxpayer if the taxpayer has been accepted into the initiative. If accepted, the IRS requires the taxpayer to submit an extensive voluntary disclosure package.

If you have any questions about the IRS voluntary offshore disclosure program, please contact our office.

Doeren Mayhew: The small employer health insurance premium credit

Under the Patient Protection and Affordable Care Act (PPACA) enacted in March 2010, small employers may be eligible to claim a tax credit of 35 percent of qualified health insurance premium costs paid by a taxable employer (25 percent for tax-exempt employers). The credit is designed to encourage small employers to offer health-insurance to their employees.

Employees and wages

An employer can claim the maximum 35 percent credit if it has no more than 10 full-time equivalent (FTE) employees receiving average annual wages of $25,000 or less. The credit is phased out as the number of FTEs increases to 25 and as average annual wages increase to $50,000. An employer with 25 or more employees, or paying average annual wages of $50,000 or more per employee, will not receive a credit.

In counting FTEs, the employer should not include owners and family members. Seasonal employees are not counted unless they work at least 120 days during the year. In determining average annual wages, employers must count all wages, bonuses, commissions or other compensation, including sick leave and vacation leave.

Applicable years

The credit took effect in 2010. It did not expire at the end of 2010 but can be claimed from year to year. The credit applies at the 35/25 percent levels for four years, through 2013. After 2013, the maximum credit increases to 50 percent for for-profit employers and 35 percent for tax-exempt employers, but only for two years. Thus, the credit can be claimed every year for the six years from 2010 and 2015. The credit is recalculated every year based on the total health insurance premiums paid. Only non-elective employer premiums are counted; salary reduction contributions paid through a cafeteria plan or other arrangement are not counted.

Premiums

An employer must pay at least 50 percent of the premium cost of health insurance coverage, and must pay the same uniform percentage of costs for each employee who obtains health insurance through the employer. A transition rule for 2010 treats an employer as satisfying the uniformity rule as long as the employer pays at least 50 percent of the coverage costs of each employee, based on the cost of employee-only (single) coverage, even if the employer does not pay the same percentage of costs for each employee.

The premiums must be paid for qualified health insurance, such as a hospital or medical service plan or health maintenance organization. It includes coverage for dental, vision, long-term care, nursing home care, and coverage for a specified disease or illness. Coverage does not accident insurance, disability income insurance, and workers' compensation.

Claiming the credit

The credit is determined on Form 8941, Credit for Small Employer Health Insurance Premiums. For-profit employers report the amount of the credit on Form 3800, General Business Credit, and attach the forms to their income tax return. As a general business credit, any unused credit (in excess of taxable income) can be carried back one year (except for a credit arising in 2010, the first year) or carried forward 20 years. For-profit employers deduct the credit from the premiums paid for health insurance, when computing the deduction for health insurance premiums.

Tax-exempt employers report the credit on Form 990-T, Exempt Organization Business Income Tax Return, regardless of whether the organization is subject to tax on unrelated business income. The credit is refundable for tax-exempt employers, provided it does not exceed the employer's income tax withholding and Medicare taxes. The credit is not refundable if the employer does not claim the credit on Form 990-T.

Doeren Mayhew FAQ: What are the rules for claiming dependents?

The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.

Dependency deduction

You are allowed one dependency exemption deduction for each person you claim as a qualifying dependent on your federal income tax return. The deduction amount for the 2010 tax year is $3,650. If someone else may claim you as a dependent on their return, however, then you cannot claim a personal exemption (also $3,650) for yourself on your return. Additionally, your standard deduction will be limited.

Only one taxpayer may claim the dependency exemption per qualifying dependent in a tax year. Therefore, you and your spouse (or former spouse in a divorce situation) cannot both claim an exemption for the same dependent, such as your son or daughter, when you are filing separate returns.

Who qualifies as a dependent?

The term "dependent" includes a qualifying child or a qualifying relative. There are a number of tests to determine who qualifies as a dependent child or relative, and who may claim the deduction. These include age, relationship, residency, return filing status, and financial support tests.

The rules regarding who is a qualifying child (not a qualifying relative, which is discussed below), and for whom you may claim a dependency deduction on your 2010 return, generally are as follows:

-- The child is a U.S. citizen, or national, or a resident of the U.S., Canada, or Mexico;

-- The child is your child (including adopted or step-children), grandchildren, great-grandchildren, parents, brother, sister (including step-parents, -brothers, and -sisters), half-siblings, in-laws, and if related by blood, uncles, aunts, nieces, and nephews;

-- The child has lived with you a majority of nights during the year, whether or not he or she is related to you;

-- The child receives less than $3,650 of gross income (unless the dependent is your child and either (1) is under age 19, (2) is a full-time student under age 24 before the end of the year), or (3) any age if permanently and totally disabled;

-- The child receives more than one-half of his or her support from you; and

-- The child does not file a joint tax return (unless solely to obtain a tax refund).

Qualifying relatives

The rules for claiming a qualifying relative as a dependent on your income tax return are slightly different from the rules for claiming a dependent child. Certain tests must also be met, including a gross income and support test, and a relationship test, among others. Generally, to claim a "qualifying relative" as your dependent:

-- The individual cannot be your qualifying child or the qualifying child of any other taxpayer;

-- The individual's gross income for the year is less than $3,650;

-- You provide more than one-half of the individual's total support for the year;

-- The individual either (1) lives with you all year as a member of your household or (2) does not live with you but is your brother or sister (include step and half-siblings), mother or father, grandparent or other direct ancestor, stepparent, niece, nephew, aunt, or uncle, or inlaws. Foster parents are excluded.

Although age is a factor when claiming a qualifying child, a qualifying relative can be any age.

Special rules for divorced and separated parents

Certain rules apply when parents are divorced or separated and want to claim the dependency exemption. Under these rules, generally the "custodial" parent may claim the dependency deduction. The custodial parent is generally the parent with whom the child resides for the greater number of nights during the year.

However, if certain conditions are met, the noncustodial parent may claim the dependency exemption. The noncustodial parent can generally claim the deduction if:

-- The custodial parent gives up the tax deduction by signing a written release (on Form 8332 or a similar statement) that he or she will not claim the child as a dependent on his or her tax return. The noncustodial parent must attach the statement to his or her tax return; or

-- There is a multiple support agreement (Form 2120, Multiple Support Declaration) in effect signed by the other parent agreeing not to claim the dependency deduction for the year.

Doeren Mayhew: How Do I? Correct a mistake on a tax return I've already filed?

Have you already mailed (on paper or electronically) your Form 1040 for the 2010 tax year but only now noticed you made an error when preparing the return? If you need to correct a mistake on your federal income tax return that you've already filed with the IRS, it's not too late to file another original Form 1040, as opposed to filing an amended return. The last original return filed on or before April 18 will be your official tax return.

Correcting a mistake

Taxpayers cannot file more than one original tax return per tax year, unless the filing deadline for the tax year has not passed. If you have already filed an original Form 1040 with the IRS, but want to correct a mistake you made on the return (such as claiming a deduction or credit you discovered you were entitled to, or removing a credit or deduction you are not qualified to take, changing your filing status, or income, for example) you can actually still file another original return if it is properly filed on or before April 18, 2011 (the filing deadline for this tax season).

Example. You filed your 2010 individual income tax return, Form 1040, on February 1, 2011. But in late February you discovered that you made a mistake on your return. You can file another original return if you file the new return on or before April 18, 2011 (in most other tax years, it is April 15, but due to the Emancipation Day holiday celebrated in Washington, D.C., the deadline for filing returns this year has been moved to April 18). The last original return filed on or before April 18 will be your official tax return. Thus, the last filed return you send before the filing deadline (April 18) is the one that counts as the original return for IRS purposes.

Amended returns

However, if you discover the error on your original return after April 18 has passed, you must file an amended return, Form 1040X, Amended U.S. Individual Income Tax Return, to correct your previously filed return. You cannot file another original Form 1040, since the filing deadline has come and gone. Certain tax elections once made on the original return, however, are irrevocable. Also, any tax not paid with the original return accrues interest. However, as long as a mistake is corrected on an amended return before the original return is audited, penalties are generally waived.

Doeren Mayhew: March 2011 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 March 2011.

March 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 23-25.

March 4

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 26-March 1.

March 9

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 2-4.

March 10

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

March 11

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

March 15

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

March 16

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 9-11.

March 18

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 12-15.

March 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 16-18.

March 25

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 19-22.

March 30

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates March 23-25.

Tuesday, February 1, 2011

Filing season starts with delays for some taxpayers, extended tax incentives for others

As February gets underway, the 2011 filing season is about to kick into high-gear. The IRS began processing 2010 returns from individuals in January but some taxpayers have to wait until mid-February to file their returns. Additionally, the traditional April 15 filing deadline is extended three more days in 2011, so taxpayers have some extra time to file. All these changes and more may make the start of the filing season challenging. Individuals who are informed about the changes can better navigate their return preparation.

Filing delays

In December 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act). The new law renewed many individual and business tax incentives that had expired after 2009 for 2010 (and sometimes for 2011 and beyond).

All of these late changes to the Tax Code required the IRS to quickly redesign its forms and reprogram its computer systems. The IRS began processing 2010 returns in January. However, some individuals must wait until February 14, 2011 to file their 2010 returns because of the late legislation. They are:

Taxpayers claiming itemized deductions on Form 1040, Schedule A: Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses, as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction, which was extended by the 2010 Tax Relief Act.
Taxpayers claiming the higher education tuition deduction. This deduction for parents and students is claimed on Form 8917.
Taxpayers claiming the teacher's classroom expense deduction. This deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.

The delays affect individuals who file their 2010 Forms 1040 on paper or electronically. Individuals who electronically file their returns can get a head start because many major software providers will accept these impacted returns immediately. The software providers will hold on to the returns and then electronically submit them after the IRS systems open on February 14, 2011 for the delayed forms.

Some of the late changes to the Tax Code have not resulted in delays. For example, the 2010 Tax Relief Act provides for higher 2010 exemption amounts for the alternative minimum tax (AMT). The IRS was able to reprogram its operating systems for this development without any delay for affected taxpayers. Other changes in the 2010 Tax Relief Act do not have any affect on 2010 returns. These include the extension of the American Opportunity Tax Credit and creation of a two percent payroll tax cut for 2011. These changes have no effect on 2010 returns.

April 18

Because of a little-known holiday in the District of Columbia, taxpayers get extra days to file their 2010 returns in April. Friday, April 15, 2011, is Emancipation Day in the District of Columbia. By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do. Therefore, all taxpayers will have three extra days to file this year: 2010 individual returns are due April 18, 2011. Taxpayers requesting an extension will have until October 17, 2011 to file their 2010 tax returns.

Form 1040

Form 1040 and its schedules (especially Schedule A for itemized deductions) for 2010 looks very similar to Form 1040 for 2009 but there are some changes. Among the changes are:

Standard deduction. The basic standard deduction amounts for 2010 are $5,700 for single individuals; $11,400 for married couples filing a joint return and surviving spouses; $8,400 for heads of household filers; and $5,700 for married taxpayers filing separate returns.

Taxes paid. Taxpayers can elect to deduct state and local sales taxes paid in 2010 in lieu of deducting state and local income taxes paid in 2010. To calculate their deduction, taxpayers can use either actual expenses or the IRS optional sales tax tables.

Adoption credit. Effective for 2010 (and 2011), the adoption credit is refundable. For 2010, the amount of the adoption credit (and maximum exclusion) is $13,170.

Roth IRAs and designated Roth accounts. For tax years beginning before January 1, 2010, an individual may not convert amounts in a traditional IRA to a Roth IRA if his or her modified adjusted gross income (AGI) for the year of distribution exceeds $100,000 (or, if married, do not file jointly). The $100,000 limit and the requirement that a married distributee file a joint return do not apply to distributions made on or after January 1, 2010.

Under a default rule for 2010, half of the taxable amount that results from a rollover or conversion to a Roth IRA from another retirement plan is reported in 2011 and the other half is reported in 2012. An individual may elect to report the entire taxable amount in 2010. The same rule applies to a rollover after September 27, 2010 to a designated Roth account in the same plan. The election may not be revoked after the due date (including extensions) of the individual's 2010 return.

Casualty losses. For 2010, each personal casualty or theft loss is limited to the excess of the loss over $100 (down from $500 for 2009). This is in addition to the 10 percent of AGI limit that generally applies to the net loss.

Health insurance. The health care reform law enacted in early 2010 provides that the value of any employer-provided health insurance coverage for an employee's child is excluded from the employee's income through the end of the tax year in which the child turns age 26. The tax benefit is effective March 30, 2010. Consequently, the exclusion applies to any coverage that is provided to an adult child from that date through the end of the tax year in which the child turns age 26.

Small employer health insurance credit. The health care reform law also created a new tax credit to help small employers provide health insurance to their employees. The credit reaches 35 percent (25 percent for tax-exempt employers) of qualified premium costs. The credit is subject to various limitations, including phase-out based on wages and number of full-time equivalent employees (Line 53).

Self-employed individuals. The Small Business Jobs Act of 2010 allows the deduction for income tax purposes for the cost of health insurance in calculating net earnings from self-employment for purposes of self-employment taxes. The provision only applies to the self-employed taxpayer's first tax year beginning after December 31, 2009.

These are just some of the changes that may impact you. Please contact our office for more details.

Tax law changes for 2011 impact individuals and businesses

Legislation enacted during the past few years, including the Small Business Jobs Act of 2010 and the more recently enacted Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act), contains a number of important tax law changes that affect 2011. Key changes for 2011 affect both individuals and businesses. Certain tax breaks you benefited from in 2010, or before, may have changed in amount, timing, or may no longer be available in 2011. However, new tax incentives may be valuable. This article highlights some of the significant tax changes for 2011.

New payroll tax cut for wage earners

New for calendar 2011 is a payroll tax cut for wage earners and self-employed individuals. The payroll tax cut, as provided by the 2010 Tax Relief Act, reduces the employee's share of Social Security taxes by two percent, from 6.2 percent to 4.2 percent, for all wages earned during the 2011 calendar year, up to the taxable wage base of $106,800. Future Social Security is not affected by the payroll tax cut.

Many workers can expect to see an average tax savings of more than $1,000 as a result of the new payroll tax cut. For example, a single individual who earns $40,000 annually and is paid weekly will see an extra $15 in her paycheck every week. A single individual who earns $60,000 annually and is paid bi-weekly will see an extra $46 in her paycheck.

Self-employed individuals also benefit from the payroll tax cut. Self-employed individuals will pay 10.4 percent on self-employment income up to the threshold.

Payroll companies and employers are responsible for implementing the payroll tax cut; employees do not need to adjust their withholding or take any other action. However, it is always a good decision regardless to review your withholding to ensure you are not withholding too much or too little.

No more Making Work Pay Credit. The payroll tax cut replaces the Making Work Pay Credit (MWPC), which expired at the end of 2010 and was not renewed for 2011. The MWPC provided a refundable tax credit of up to $400 for qualified single individuals and up to $800 for married taxpayers filing joint returns for 2009 and 2010.

Residential energy improvement credits

For individuals who may be making energy-efficient improvements to their homes in 2011 important changes have taken place for a popular tax credit. The 2010 Tax Relief Act extended the Code Sec. 25C nonbusiness energy efficient property credit for homeowners for one year, through December 31, 2011. However, more restrictive rules apply for 2011 than applied in 2010. Effective for property placed in service after December 31, 2010, an individual is entitled to a credit against tax in an amount equal to:

10 percent of the amount paid or incurred for qualified energy efficiency improvements (building envelope components) installed during the tax year, and
The amount of residential energy property expenditures paid or incurred during the tax year.

The maximum credit allowable is $500 over the lifetime of the taxpayer. The $500 amount must be reduced by the aggregate amount of previously allowed credits the taxpayer received in 2006, 2007, 2009 and 2010. There are certain restrictions on the amounts claimed for certain items as well. The amount claimed for windows and skylights in a year can not exceed $200 less the total of the credits you claimed for these items in all earlier tax years ending after December 31, 2005. The credit also can not exceed:

-- $50 for an advanced main circulating fan;
-- $150 for any qualified natural gas, propane, or hot water boiler; and
-- $300 for any item of energy efficient property

Energy-efficient credit for contractors

The 2010 Tax Relief Act retroactively extends the new energy efficient home credit for eligible contractors for two years, through December 31, 2011. Eligible contractors 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.

Annuity contracts

Beginning in 2011, taxpayers may partially annuitize non-retirement plan annuity payments they receive from an annuity contract. This partial annuitization applies to amounts you receive in tax years beginning after December 31, 2010 and applies to such an annuity, endowment or life insurance contract. If you receive an annuity for a period of 10 years or longer, or over one or more lives, under any portion of the annuity, endowment or life insurance contract, that portion is treated as a separate contract for purposes of annuity taxation.

FSAs, HSAs and Archers MSAs

The Patient Protection and Affordable Care Act enacted in 2010 places new limits on flexible spending arrangements (FSAs), health savings accounts (HSAs) and Archer medical savings accounts (Archer MSAs).

After December 31, 2010, a distribution from an FSA, HSA or Archer MSA for a medicine or drug is a tax-free qualified medical expense only if the medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin. Additionally, for distributions made after 2010, the additional tax on distributions from an HSA that are not used for qualified medical expenses increases significantly, from 10 percent to 20 percent of the disbursed amount. The additional tax on distributions from an Archer MSA that are not used for qualified medical expenses increases from 15 percent to 20 percent of the disbursed amount.

Simple Cafeteria Plans for small employers

Beginning January 1, 2011, certain small employers can adopt "simple cafeteria plans," which provide certain nontaxable benefits to employees. Eligible employers generally include those with an average of 100 or fewer employees on business days during either of the two preceding tax years. Benefits of simple cafeteria plans can include certain medical coverage, group-term life insurance, flexible spending accounts (FSAs), and dependent care assistance.

New electronic filing rules for employers

Nearly all employers must use the IRS Electronic Federal Tax Payment System (EFTPS) for federal tax payments made in 2011. Beginning after December 31, 2010, employers must use electronic funds transfer (EFT) to make all federal tax deposits, including deposits of employment tax, excise tax, and corporate income tax. After December 31, 2010, Forms 8109 and 8109-B, Federal Tax Deposit Coupon, can no longer be used.

Employer payroll tax forgiveness expires

Qualified employers who hired unemployed workers after February 3, 2010 and prior to January 1, 2011 may have been eligible for payroll tax forgiveness. The Hiring Incentives to Restore Employment Act (HIRE Act) provided temporary forgiveness of the employer-share of Social Security tax for eligible new-hires. For each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.

New broker basis reporting rules

Beginning in 2011, generally all brokers who are required to file information returns reporting gross proceeds of a "covered security" (such as corporate stock), must include in the return the customer's adjusted basis in the security. A broker must report the adjusted basis and type of gain (long term or short term gain or loss) for most stock acquired on or after January 1, 2011.

Reporting is generally undertaken on Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. A "covered security" includes all stock acquired beginning in 2011, as mentioned above, except for stock in a mutual fund (regulated investment company or RIC) or stock acquired in connection with a dividend reinvestment plan (DRP). Reporting for these and other types of securities and options will need to be reported beginning after 2012 and 2013.

Real estate reporting requirements

Beginning in 2011, taxpayers receiving rental income from real estate who make payments of $600 or more during the tax year to a service provider (excluding incorporated entities) must provide an information return to the IRS, as well as the provider, reporting the payments. Typically, the information is to be reported on Form 1099-Misc. Certain exceptions, such as for hardship or active members of the uniformed services or employees of the intelligence community apply.

These are just some of the many important tax changes that expired at the end of 2010 or take effect this year. Please contact our office if you have any questions.