The Federal Insurance Contributions Act (FICA) is made up of two taxes: Old-Age, Survivors and Disability Insurance (OASDI) (Social Security) and hospital insurance (HI)(Medicare). Employers pay OASDI tax equal to 6.2 percent of an employee's taxable wages up to $106,800. The HIRE Act temporarily lifts the employer's 6.2 percent OASDI tax.

The covered employee must be on the employer's payroll after February 3, 2010 and before January 1, 2011. However, payroll tax forgiveness applies only to wages paid to covered employees after March 18, 2010 and before January 1, 2011. Example #1. Ann is hired as a full-time employee working 40 hours each week by ABC Co. Ann's hire date is January 31, 2010. On March 19, ABC Co. hires Nate as a full-time employee working 40 hours each week. On April 30, ABC Co. hires Cai as a full-time employee working 40 hours each week. Ann is not a covered employee for purposes of the HIRE Act because she began employment with ABC Co. before February 3, 2010. Cai and Nate are covered employees under the HIRE Act because their start dates are after February 3, 2010 and they are on the company's payroll after March 18, 2010.

The HIRE Act requires that employees certify they had not been employed for more than 40 hours during the 60-day period ending on the date their employment with the qualified employer began. The IRS is developing a form that employers can use to obtain the certification from covered employees.

Example #2. In example #1, Cai and Nate were covered employees under the HIRE Act because their start dates with ABC Co. were after February 3, 2010 and they were on the payroll after March 18, 2010. Before coming to work for ABC Co., Cai was employed full-time (40 hours per week) by XYZ Co. between November 1, 2002 and April 29, 2010 (one day before her date of hire by ABC Co.). Consequently, Cai cannot certify that she had not been employed for more than 40 hours during the 60-day period ending on the date of her employment with ABC Co.

A covered employee must not replace another employee of the employer, with some exceptions. The exceptions cover employees who voluntarily quit and employees who are fired for cause. Additionally, the covered employee must not be related to the employer or own a certain share of the employer's business. Some employees, for example household employees, are expressly excluded from the HIRE Act.

Retained worker tax credit

As part of the general business credit, the HIRE Act allows employers to claim a worker retention credit. For each qualified employee, the employer's general business credit is increased by the lesser of $1,000 or 6.2 percent of the retained worker's wages paid during a 52-week consecutive period.

The covered employee must be on the employer's payroll after March 18 and continue in employment for at least 52 consecutive weeks. Additionally, the covered employee's wages during the last 26 weeks of the 52 consecutive week period must equal at least 80 percent of the wages paid during the first 26 weeks of that period.

Example #3. In example #1, Nate was a covered employee under the HIRE Act because his start date with ABC Co. was after February 3, 2010. Additionally, Nate qualified his employer for payroll tax forgiveness because he was on the company's payroll after March 18, 2010. At the close of business on September 24, 2010, Nate resigns from ABC Co. Consequently, ABC Co. may claim payroll tax forgiveness for Nate for the period between March 19, 2010 and September 24, 2010 but ABC Co. cannot claim the retained worker tax credit because Nate did not remain employed with the company for at least 52 consecutive weeks.

Employers will need to maintain careful records with respect to each new employee hired in order to show that the new worker qualifies the employer for the credit. It is presumed that the IRS will begin crafting a form to be used by employers in order to claim the credit.

Please contact our office if you have any questions about the HIRE Act. The business incentives are temporary, so don't delay.

Your 2011 tax return has been filed, or you have properly filed for an extension. In either case, now it’s time to start thinking about important post-filing season activities to save you tax in 2012 and beyond.  A few loose ends may pay dividends if you take care of them sooner instead of later.

Successful filing season

The IRS reported that the 2012 filing season moved along without significant problems. The IRS continued to upgrade its return processing programs and systems.  Early in the filing season, some filers experienced a short delay in receiving refunds but the delay was quickly resolved.  The IRS reported just before the end of the filing season that it had processed nearly 100 million returns and issued 75 million refunds. 

Extensions

Individuals are eligible for an automatic six-month extension until October 15 to file a return. To get the extension, taxpayers must estimate their tax liability and pay any amount due.  When a taxpayer properly files for an extension, he or she avoids the late-filing penalty, generally five percent per month based on the unpaid balance, which applies to returns filed after the April 17 deadline. Any payment made with an extension request will reduce or eliminate interest and late-payment penalties that apply to payments made after April 17. The current interest rate is three percent per year, compounded daily, and the late-payment penalty is normally 0.5 percent per month.

Installment agreements

Installment agreements generally can be set up quickly with the IRS and help to spread out payments to make them more manageable.  In 2012, the IRS increased the threshold for a streamlined installment agreement from $25,000 to $50,000. Installment agreements however, come with some costs.  The IRS charges a fee to set up an installment agreement.  If you cannot pay the full amount within 120 days, the fee for setting up an agreement is:

• $52 for a direct debit agreement;
• $105 for a standard agreement or payroll deduction agreement; or
• $43 for qualified lower income taxpayers.

It’s important to make your scheduled payments timely and in full. The IRS expects you to pay the minimum amount agreed on; you can always pay more if you are able.  If your installment agreement goes into default, the IRS can charge a reinstatement fee.

An installment agreement does not reduce the amount of the taxes, interest, or penalties owed, and penalties and interest will continue to accrue. In determining the amount of the penalty for failure to pay tax, the penalty is reduced from 0.5 percent per month to 0.25 percent per month during any month that an installment agreement for the unpaid tax is in effect.

You must specify the amount you can pay and the day of the month (1st-28th) on which you wish to make your payment each month. The IRS expects to receive your payment on the date you select. The IRS will respond to your request, usually within 30 days, to advise you as to whether your request has been approved or denied, or if more information is needed.

Amended returns

Taxpayers can file an amended return if they find an error, uncover unreported income or discover an item that will generate a deduction. Amended returns are filed on Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040, Form 1040A, Form 1040EZ, Form 1040NR, or Form 1040NR-EZ. If you are filing to claim an additional refund, wait until you have received your original refund. If you owe additional tax for a tax year for which the filing date has not passed, file Form 1040X and pay the tax by the filing date for that year to avoid penalties and interest. 

Generally, to claim a refund, Form 1040X must be filed within 3 years from the date of your original return or within two years from the date you paid the tax, whichever is later. Returns filed before the due date (without regard to extensions) are considered filed on the due date. Taxpayers must file a separate Form 1040X for each year they are amending.

Targeted penalty relief

This year – for the first time – the IRS offered penalty relief to qualified individuals who were unable to pay their taxes by the April 17 deadline. Unemployed filers and self-employed individuals whose business income dropped substantially can apply for a six-month extension of time to pay, the IRS explained. Eligible taxpayers will not be charged a late-payment penalty if they pay any tax, penalty and interest due by October 15, 2012. Taxpayers qualify if they were unemployed for any 30-day period between January 1, 2011 and April 17, 2012. Self-employed people qualify if their business income declined 25 percent or more in 2011, due to the economy.  However, income limits apply, which excluded many taxpayers from the program.

Records

The IRS advises that taxpayers maintain tax records for three years.  In many cases, especially for individuals with complex returns, records should be kept longer. Our office maintains taxpayer records with the utmost care and confidentiality.

We encourage you to contact us if you have any questions about the end of the 2011 filing season and how your 2011 return can provide a roadmap to tax savings in 2012.

After three days of oral arguments in March, the Supreme Court is deciding the fate of the Pension Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation Act (HCERA).  Not only do the new laws impact health care, they contain numerous tax provisions, many of which have yet to take effect.  The Supreme Court may uphold the laws, strike them down in whole or in part, or decide that the case is premature.  The Supreme Court is expected to render its decision in June.  In the meantime, a quick checklist of the tax provisions in the two laws reveals how extensively they impact individuals, businesses and taxpayers of all types.

Challenges

Congress passed, and President Obama signed, the PPACA and HCERA in 2010.  Almost immediately, several states and taxpayers challenged the laws in court.  The lawsuits generally argued that Congress had exceeded its authority by requiring individuals to obtain health insurance.

The cases made their way from federal district courts to the various federal courts of appeal, which reached different conclusions.  One circuit court invalidated the individual mandate; two circuit courts upheld the individual mandate and another circuit court dismissed the challenge on procedural grounds.

Supreme Court grants review

On November 14, 2011, the United States Supreme Court agreed to review the Eleventh Circuit Court’s decision in Florida v. U.S. Department of Health and Human Services.  The Supreme Court stated it would examine four issues: (1) the Constitutionality of the individual mandate; (2) whether the individual mandate is severable from the PPACA; (3) whether the challenge to the individual mandate is barred by the Anti-Injunction Act^; and (4) whether PPACA’s expansion of Medicaid exceeded Congress's authority. The Supreme Court heard oral arguments in the case on March 26-28 in Washington, D.C. 

Individual mandate and penalty

The individual mandate generally requires individuals to maintain minimum essential coverage for themselves and their dependents after 2013. Individuals will be required to pay a penalty for each month of noncompliance, unless they are exempt (such as individuals covered by Medicaid and Medicare).  The PPACA also provides tax incentives to help individuals obtain minimum essential coverage.  Beginning in 2014, individuals with incomes within certain federal poverty thresholds may qualify for a refundable health insurance premium assistance tax credit.  The PPACA also provides for advance payment of the credit.

In Florida v. HHS, the Eleventh Circuit struck down the individual health insurance mandate but did not declare the entire PPACA unconstitutional.  In contrast, the Sixth Circuit held that the individual mandate was a valid exercise of Congress’ power to regulate commerce (Thomas More Law Center v. Obama).  The Court of Appeals for the District of Columbia Circuit also upheld the individual mandate (Mead v. Holder).  The Supreme Court could find the entire PPACA unconstitutional or could find that the individual mandate is severable, thereby preserving other parts of the statute, including various tax provisions.

Tax provisions

While much attention has focused on the individual mandate, the Supreme Court may also decide the fate of many tax provisions in the PPACA and the HCERA. Among the tax provisions potentially affected by the Supreme Court’s decision are:

• Code Sec. 45R small employer health insurance tax credit;

• 3.8 percent Medicare contribution tax on unearned income for higher income taxpayers after 2012;

• Additional 0.9 percent Medicare tax on wages and self-employment income of higher income taxpayers after 2012;

• Increased itemized deduction for unreimbursed medical expenses after 2012;

• Prohibition on over-the-counter medicines being eligible for health flexible spending arrangement (FSA), health reimbursement arrangement (HRA), health savings account (HSA), and Archer Medical Savings Account (MSA) dollars.

• Additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses;

• Excise tax on high-dollar health plans after 2017;

• Tax credit for therapeutic discovery projects;

• Annual fees on manufacturers and importers of branded prescription drugs;

• Reporting of employer-provided health coverage on Form W-2;

• Codification of the economic substance doctrine.

Anti-Injunction Act

The Supreme Court could decide that the challenge to the PPACA is premature.  Under the Anti-Injunction Act, a taxpayer must wait to oppose a tax until after it is collected.  The PPACA’s individual mandate and its related penalty do not take effect until 2014.  The Fourth Circuit Court of Appeals found that the penalty amounted to a tax and taxpayers could not challenge the tax until it took effect (Liberty University v. Geithner).

If you have any questions about the tax provisions in the health care reform laws, please contact our office. We will be following developments as they ensue after the Supreme Court issues its decision in June.

Proposals to reform retirement savings plans were highlighted during an April 2012 hearing by the House Ways and Means Committee.  Lawmakers were advised by many experts to move slowly on making changes to current retirement programs that might discourage employers from sponsoring plans for their workers.  Nevertheless, it is clear that Congress wants to make some bold moves in the retirement savings area of the tax law and that likely it will do so under the broader umbrella of general “tax reform.” While tax reform is gaining momentum, it is unlikely to produce any change in the tax laws until 2013 or 2014. Considering that retirement planning necessarily looks long-term into the future, however, now is not too soon to pay some attention to the proposals being discussed.

Testimony

The Chief of Actuarial Issues and Director of Retirement Policy for the American Society of Pension Professionals and Actuaries testified that current federal tax incentives can transform taxable bonuses for business owners into retirement savings contributions that benefit both owners and employees. “This incentive for the business owner to contribute for other employees results in a distribution of tax benefit that is more progressive than the current income tax structure," she observed.

An American Benefits Council representation warned at the hearing that the wisest course for lawmakers is to not enact new laws that would disrupt the success of the current system. Short-term retirement legislation designed to boost tax revenues generally do so by eliminating the existing savings incentives and eroding the amount that workers actually save.

Committee Chairman Dave Camp, R-Mich. questioned whether the large number of retirement plans now existing with their different rules and eligibility criteria leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings. Ranking member Sander Levin, D-Mich., questioned the value of making tax reform-inspired changes to retirement plans. "Tax reform should approach retirement savings incentives with an eye toward strengthening our current system and expanding participation, not as an opportunity to find revenue," Levin said.

JCT report

In advance of the hearing, the Joint Committee on Taxation (JCT) summarized the tax treatment of current-law retirement savings plans and described some recent reform proposals in a report, “Present Law and Background Relating to the Tax Treatment of Retirement Savings” (JCX-32-12). The report highlighted several of the recent proposals on retirement savings:

Automatic enrollment payroll deduction IRA.  President Obama has proposed mandatory automatic enrollment payroll deduction IRA programs.  An employer that does not sponsor a qualified retirement plan, SEP, or SIMPLE IRA plan for its employees (or sponsors a plan and excludes some employees) would be required to offer an automatic enrollment payroll deduction IRA program with a default contribution to a Roth IRA of three percent of compensation. An employer would not be required to offer the program if the employer has been in existence less than two years or has 10 or fewer employees.

Expand the saver's credit.  The Administration has also proposed to make the retirement savings contribution credit, known as the saver's credit, fully refundable and for the saver’s credit to be deposited automatically in an employer-sponsored retirement plan account or IRA to which the eligible individual contributes. In addition, in place of the current credit ranging from 10 percent to 50 percent for qualified retirement savings contributions up to $2,000 per individual, the proposal would provide a credit of 50 percent of such contributions up to $500 (indexed for inflation) per individual.

Consolidate plans.  The JCT also reviewed two retirement proposals from the Bush administration:  Consolidating traditional and Roth IRAs into a single type of account called Retirement Savings Accounts (RSAs) and creating Lifetime Savings Accounts (LSAs) that could be used to save for any purpose with an annual limit for contributions of $2,000. The JCT explained that the tax treatment of RSAs and LSAs would be similar to the current tax treatment of Roth IRAs (contributions would not be deductible, and earnings on contributions generally would not be taxable when distributed). Additionally, the Bush Administration had proposed to consolidate various current-law employer-sponsored retirement arrangements under which individual accounts are maintained for employees and under which employees may make contributions into a single type of arrangement called an employer retirement savings account (ERSA).

The American Society of Pension Professionals and Actuaries (ASPPA) told the Ways and Means Committee that the large number of plans with different rules and criteria does not reduce the effectiveness of the incentives in increasing retirement savings. ”Consolidating all types of defined-contribution type plans into one type of plan would not be simplification,” the ASPPA cautioned. “It would disrupt savings, and force state and local governments and nonprofits to modify their retirement savings plans and procedures.”

Code Sec. 1231 applies to gains and losses from property used in the trade or business and from involuntary conversions. Normally, you have to determine whether property is a capital asset or is ordinary income property. Property generally can’t be both. However, Code Sec. 1231 allows you to “have it” both ways. Any gains are taxed at low capital gains rates (generally 15 percent for 2012), and any losses are treated as ordinary losses, taxable at more favorable ordinary loss rates, and available (without limit) to offset other ordinary income.

Who qualifies?

Code Sec. 1231 gains include:

--Recognized gains on the sale or exchange of property used in the trade or business; and

--Recognized gains from the involuntary or compulsory conversion (into money or other property) of property used in a trade or business, or of property held for more than one year and either used in the trade or business or used in a transaction entered into for profit.

Property used in a trade or business is property that is subject to depreciation and held by the taxpayer for more than one year.

Code Sec. 1231 losses are any recognized loss from a sale, exchange, or conversion of the same categories of property.

A win-win equation

Gains and losses from these transactions are referred to as Code Sec. 1231 gains and Code Sec. 1231 losses. The character of the gain or loss depends on whether Code Sec. 1231 gains exceed Code Sec. 1231 losses for the tax year. If the Code Sec. 1231 gains exceed the Code Sec. 1231 losses, then all of the Code Sec. 1231 gains and losses are treated as long-term capital gains and losses. The result is a net long-term capital gain. This amount can then be netted with other capital gains and losses.

Code Sec. 1231 does not apply to depreciation that must be recaptured as ordinary income under either Code Sec. 1245 (depreciable personal property and certain real property) or Code Sec. 1250 (depreciable real property that is not Code Sec. 1245 property).

If, however, the Code Sec. 1231 losses equal or exceed the Code Sec. 1231 gains, then all of the Code Sec. 1231 gains and losses are treated as ordinary income and losses. The net result is an ordinary loss, which can offset other ordinary income.

The family partnership is a common device for reducing the overall tax burden of family members. Family members who contribute property or services to a partnership in exchange for partnership interests are subject to the same general tax rules that apply to unrelated partners. If the related persons deal with each other at arm's length, their partnership is recognized for tax purposes and the terms of the partnership agreement governing their shares of partnership income and loss are respected.

Interfamily gifts

Because of the tax planning opportunities family partnerships present, they are closely scrutinized by the IRS. When a family member acquires a partnership interest by gift, however, the validity of the partnership may be questioned. For example, a partnership between a parent in a personal services business and a child who contributes little or no services is likely to be disregarded as an attempt to assign the parent's income to the child. Similarly, a purported gift of a partnership interest may be ignored if, in substance, the donor continues to own the interest through his power to control or influence the donee's business decision. When a partnership interest is transferred to a guardian or trustee for the benefit of a family member, the beneficiary is considered a partner only if the trustee or guardian must act independently and solely in the beneficiary's best interest.

Capital or services

The determination of whether a person is recognized as a partner depends on whether capital is a material income-producing factor in the partnership. Any person, including a family member, who purchases or is given real ownership of a capital interest in a partnership in which capital is a material income-producing factor is recognized as a partner automatically. If capital is not a material income-producing factor (for example, if a partnership derives most income from services, a family member is not recognized as a partner unless all the facts and circumstances show a good faith business purpose for forming the partnership.

If the family partnership is recognized for tax purposes, the partnership agreement generally governs the partners' allocations of income and loss. These allocations are not respected, however, to the extent the partnership agreement does not provide reasonable compensation to the donor for services he renders to the partnership or allocates a disproportionate amount of income to the donee. The IRS can re-allocate partnership income between the donor and donee if these requirements are not met.

Investment partnerships

The general rule for determining gain recognition for marketable securities does not apply to the distribution of marketable securities by an investment partnership to an eligible partner. An investment partnership is a partnership that has never been engaged in a trade or business (other than as a trader or dealer in the certain specified investment-type assets) and substantially all the assets of which have always consisted of certain specified investment-type assets (which do not include, for example, interests in real estate or real estate limited partnerships).

If a family limited partnership (FLP) qualifies as an investment partnership, the FLP could redeem the partnership interest of an eligible partner with marketable securities without the recognition of any gain by the redeemed partner. To qualify, substantially all the assets of the FLP must always have consisted of the eligible investment assets, and the holding of even totally passive real estate interests (real estate that does not constitute a trade or business), for instance, must be kept to a minimum. In addition, any eligible partner must have contributed only the specified investment assets (or money) in exchange for his or her partnership interest.

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 May 2012.

May 2

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

May 4

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 28–May 1.

May 9

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

May 10

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

May 11

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

May 16

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

May 18

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

May 23

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

May 25

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

May 31

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

June 1

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

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

Records

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

If you need a copy of your previous year(s) return information, you have several options. You can order a copy of your prior-year return. Alternatively, you may order a tax return transcript or a tax account transcript.  A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules.  However, a tax return transcript does not reflect any changes you or the IRS made after the return was filed. A tax account transcript shows any later adjustments you or the IRS made after the tax return was filed. 

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

Forms W-2

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

Filing deadline

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

Casualty losses

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

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

Retirement savings

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

IRS Fresh Start Initiative

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

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

Tax law changes

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

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

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

Payroll tax cut

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

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

Extenders

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

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

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

IRS budget

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

Tax planning

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

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

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

Contributions of property

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

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

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

Vehicles

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

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

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

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

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

Beginning in 2010, the income limitations that have prevented taxpayers with modified adjusted gross incomes of $100,000 or more and married taxpayers that filed their returns separately from converting a traditional individual retirement account (IRA) to a Roth IRA are eliminated entirely. As a bonus to kick off "unlimited Roth conversions," any income tax payments due on 2010 conversions may be deferred into 2011 and 2012. For higher-income individuals, 2010 presents a long-awaited and much anticipated opportunity to convert their savings into a Roth IRA providing tax-free distributions during their retirement years.

Eligibility for a Roth conversion in 2010 does not automatically make it a good decision for every taxpayer. Indeed, under the right circumstances, converting to a Roth IRA can provide potential significant tax and financial benefits. But every individual's needs and circumstances are unique, and a Roth IRA conversion must be assessed in light of your particular tax and financial situation. In addition, converting to a Roth IRA is not a "do-it-yourself" transaction, and you should consult with a tax professional about the benefits and drawbacks relating to your personal situation.

The new conversion opportunity does not apply to funds held in a 401(k). The conversion opportunity applies to traditional IRAs, in addition to SIMPLE IRAs and SEP plans.

Conversion methods

A conversion to a Roth IRA may generally be accomplished by one of three means:

-- Rollover. An IRA rollover involves making an eligible distribution from your traditional IRA that is rolled over into a Roth IRA within 60 days after the distribution. If the rollover does not occur within 60 days, it will be treated as an early withdrawal subject to a 10 percent early withdrawal tax as well as federal (and possible state) income taxation.

-- Trustee-to-trustee transfer. If your IRA trustee is the same trustee for your traditional IRA and Roth IRA, you may have that trustee make the account transfer on your behalf. Additionally, if the trustee is not the same, your traditional IRA trustee can also transfer the funds to your new, Roth IRA trustee on your behalf, even if they are not the same trustee for the accounts.

-- Account redesignation.

Regardless of type of means you use to convert to a Roth IRA, amounts converted from a non-Roth IRA to a Roth IRA are treated as distributed from the non-Roth IRA and rolled over to the Roth IRA. As mentioned above, a rollover must generally be effectuated within 60 days.

Income tax consequences

The government is encouraging Roth conversions not only to shore up retirement savings but also to gain short time revenues. It accomplishes the latter because a conversion from a traditional IRA is counted as a taxable distribution in which income taxes must be paid. Unlike such distributions outside of a Roth conversion, however, no early withdrawal penalty is imposed. Since you would be taxed on your traditional IRA distributions eventually anyway upon retirement, having the distribution taxed at the time of a Roth conversion can be viewed as an acceleration of that tax. In return, however, the funds that become part of your Roth account, including future earnings of them, become tax free forever into the future.

For conversions taking place in 2010, you have the option to elect to recognize the taxable income generated on the conversion amount ratably in adjusted gross income (AGI) in 2011 and 2012, instead of recognizing it all in 2010. This election does not spread the tax that would otherwise be paid in 2010 to 2011 and 2012; rather, it spreads the income realized in 2010, half into 2011 and half into 2012. That income, half in 2011 and half in 2012, is taxed at 2011 and 2012 rates, respectively, along with any other income normally realized for those years. It is important to "do the math" on this election before making any decision.

Conversion transaction

The institution or brokerage at which you maintain your traditional IRA will generally have a Roth Conversion Form, or similar document, that you must fill out to complete the transaction. The form may ask you for the name and account number of the IRA that you want to convert, whether you want to convert the entire amount of the traditional IRA, or only a part of the account, and the amount of the IRA you want to convert to the Roth IRA (or number of shares). Typically, the form will also inform your federal and state income tax withholding obligations regarding the transaction. You will have the opportunity to elect withholding, or elect not to have anything withheld from the funds in order to meet your anticipated income tax obligations from the transaction.

Note. Whether you pay the taxes on the transaction from the funds transferred to the Roth IRA itself, or with outside funds, is an important decision you make. In general, taxpayers are better off paying the tax, if they can, with funds outside the account. You should discuss the taxation aspect of the conversion with your tax advisor.

If you use your home computer for business purposes, knowing that you can deduct some or all of its costs can help ease the pain of the large initial and ongoing cash outlay. In today's economic climate, many individuals may be working more from home than commuting to the office. The deduction rules related to home computer costs can be complicated; some of the complexities are derived from situations in which the computer is used partly for personal use and partly for work purposes.

A tax deduction for all or part of the expense of a computer can still help lower the bottom-line price tag of a computer purchase. But despite both the widespread use of computers and the temptation to somehow "write them off" on a tax return, the business use of your home computer will need to fall within these standard rules if you want to take any related deductions.

Business reason

To claim a deduction for your home computer (and any peripheral equipment), you will need to prove that the expense occurred in connection with an active business - just as you would for any other business expense. An active business for purposes of a business expense related to a home computer will usually arise from one of two types of business activities: as a self-employed sole proprietor of an independently-run profit-making business; or as an employee doing work from home. Deductions from both types of activities are handled differently on an individual's income tax return and there are separate conditions that must be met for either scenario.

Employees. A miscellaneous itemized deduction on Schedule A is allowed for computer costs that are directly related to the "job" of being an employee. In order to claim a deduction for computer-related expenses as an employee, you must show a legitimate reason related to your employment for regularly using a computer at home. That is, you will need to demonstrate that the computer is used for the convenience of your employer and using the computer at home is a condition of your employment.

The availability of a computer in the office, the ability for you to keep your job without the home computer, the lack of telecommuting policy at work, or the lack of proof that your computer is used regularly for office work will make it more difficult to convince the IRS that a legitimate business reason exists for the deduction.

Note to employees. Computer-related business expenses taken as a miscellaneous itemized deduction are deductible only to the extent that your total miscellaneous itemized deductions exceed 2 percent of your adjusted gross income. For many taxpayers, a good strategy is to "bunch" purchases of computer equipment all in one year so that more of the cost will rise above the 2 percent floor.

Self-employed individuals. Self-employed persons generally have a less difficult time depreciating or expensing the cost of computers used exclusively in their businesses. In order for you as a self-employed person to deduct computer-related costs on Schedule C - whether for a home-based computer or one in a separate business location - it is required that your expenses relate to a profit-motivated business versus a "hobby". In the eyes of the IRS, a business will be deemed a hobby if there is no profit motive and the "business" is half-heartedly pursued simply to write off items or achieve some other personal purpose. If your Schedule C business shows a net loss year after year, you may be considerably more likely to have the IRS audit your return to inspect whether your purported business is actually legitimate under the tax law.

However, if you are self-employed and you also use the computer for personal purposes, be sure to use the computer more than 50 percent of the time for business purposes to gain the maximum deduction and to avoid recapture of prior computer-related deductions you have taken.

Other IRS considerations

Aside from applying the general rules discussed above for a for-profit business and miscellaneous itemized deductions to determine if you are able to deduct business-related computer costs, the IRS is likely to dust off other standard tax principles in evaluating whether your computer expense write off is acceptable:

• Depreciation. Business items that have a useful life beyond the current tax year generally must be written off, or depreciated, over its useful life. As technological equipment, computer equipment is assumed to have a 5-year life. Accelerated depreciation of those 5 years is allowed for all but "listed property" (see below). An exception to the mandatory 5-year write off involves items that qualify for "Section 179" expensing (see below). Keep in mind that only the cost associated with the business-use portion of your computer can be expensed.

• Section 179 deduction. Section 179 expensing allows you to deduct each year up to $250,000 in 2009 of the cost of otherwise depreciable business equipment, including computers. As with depreciation, keep in mind that only the cost associated with the business-use portion of your computer can be expensed.

"Listed property" exception. A computer used in the home is generally considered to be "listed property," which may limit the deductibility of associated costs and increase substantiation burdens on the taxpayer (unless the computer is used exclusively in your trade or business). A computer that is considered listed property may be depreciated only if you can prove that the computer is used for the convenience of your employer and is required as a condition of employment. This requires you to demonstrate that you cannot perform your job without the use of the computer.

The "listed property" exception will deny Section 179 expensing if a home computer is used only 50 percent or less for business purposes. If so, you must depreciate the computer evenly over 5 years. For example, if the business-use portion of a $10,000 computer is 80 percent, then $8,000 of its cost qualifies for direct expensing. If 45 percent is used for business, no part of the cost may be immediately expensed.

• Recordkeeping. Since most home computers are "listed property," listed property substantiation rules apply. These rules require you to keep a contemporaneous log every time you use your computer to prove the percentage of your business use.

• Internet connectivity. If you use a modem to connect your computer to the Internet, keep in mind that the first phone line to a home office is not deductible, even on a pro-rated basis. A second line, however, may be written off as a business expense. If you connect via DSL or incur other Internet-only access service costs, be aware that the IRS has not taken a position here but some experts predict that the IRS eventually may consider the potential for personal Internet use to compromise such a deduction.

• Computer software. Computer software generally may be amortized using the straight-line method over a 36-month period if the costs are separately stated from the hardware.

• Computer repairs. Repairs that don't upgrade the useful life of the machine may be deducted immediately. However, making significant system enhancements, such as adding additional memory, would generally need to be added to basis and capitalized.

No use worrying. More than five million people every year have problems getting their refund checks so your situation is not uncommon. Nevertheless, you should be aware of the rules, and the steps to take if your refund doesn't arrive.

Average wait time

The IRS suggests that you allow for "the normal processing time" before inquiring about your refund. The IRS's "normal processing time" is approximately:

• Paper returns: 6 weeks
• E-filed returns: 3 weeks
• Amended returns: 12 weeks
• Business returns: 6 weeks

IRS website "Where's my refund?" tool

The IRS now has a tool on its website called "Where's my refund?" which generally allows you to access information about your refund 72 hours after the IRS acknowledges receipt of your e-filed return, or three to four weeks after mailing a paper return. The "Where's my refund?" tool can be accessed at www.irs.gov.

To get out information about your refund on the IRS's website, you will need to provide the following information from your return:

• Your Social Security Number (or Individual Taxpayer Identification Number);
• Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and
• The exact whole dollar amount of your refund.

 Start a refund trace

If you have not received your refund within 28 days from the original IRS mailing date shown on Where's My Refund?, you can start a refund trace online.

Getting a replacement check

If you or your representative contacts the IRS, the IRS will determine if your refund check has been cashed. If the original check has not been cashed, a replacement check will be issued. If it has been cashed, get ready for a long wait as the IRS processes a replacement check.

The IRS will send you a photocopy of the cashed check and endorsement with a claim form. After you send it back, the IRS will investigate. Sometimes, it takes the IRS as long as one year to complete its investigation, before it cuts you a replacement check.

A bigger problem

Another problem may come to the fore when the IRS is contacted about the refund. It might tell you that it never received your tax return in the first place. Here's where some quick action is important.

First, you are required to show that you filed your return on time. That's a situation when a post-office or express mail receipt really comes in handy. Second, get another, signed copy off to the IRS as quickly as possible to prevent additional penalties and interest in case the IRS really can prove that you didn't file in the first place.

Minimize the risks

When filing your return, you can choose to have your refund directly deposited into a bank account. If you file a paper return, you can request direct deposit by giving your bank account and routing numbers on your return. If you e-file, you could also request direct deposit. All these alternatives to receiving a paper check minimize the chances of your refund getting lost or misplaced.

If you've moved since filing your return, it's possible that the IRS sent your refund check to the wrong address. If it is returned to the IRS, a refund will not be reissued until you notify the IRS of your new address. You have to use a special IRS form.

IRS may have a reason

You may not have received your refund because the IRS believes that you aren't entitled to one. Refund claims are reviewed -usually only in a cursory manner-- by an IRS service center or district office. Odds are, however, that unless your refund is completely out of line with your income and payments, the IRS will send you a check unless it spots a mathematical error through its data-entry processing. It will only be later, if and when you are audited, that the IRS might challenge the size of your refund on its merits.

IRS liability

If the IRS sends the refund check to the wrong address, it is still liable for the refund because it has not paid "the claimant." It is also still liable for the refund if it pays the check on a forged endorsement. Direct deposit refunds that are misdirected to the wrong account through no fault of your own are treated the same as lost or stolen refund checks.

The IRS can take back refunds that were paid by mistake. In an erroneous refund action, the IRS generally has the burden of proving that the refund was a mistake. Nevertheless, although you may be in the right and eventually get your refund, it may take you up to a year to collect. One consolation: if payment of a refund takes more than 45 days, the IRS must pay interest on it.

If you are still worrying about your refund check, please give this office a call. We can track down your refund and seek to resolve any problem that the IRS may believe has developed.

Q: An extension to file my tax return seems such a painless procedure, is there any good reason for me not to postpone my filing deadline to avoid just one more hassle during the busy start of Spring?

Q: An extension to file my tax return seems such a painless procedure, is there any good reason for me not to postpone my filing deadline to avoid just one more hassle during the busy start of Spring?

A: Many taxpayers unrealistically and, to their own detriment, believe that when the IRS grants them an extension to file their tax return, it is the "magic wand" that waves away all tax concerns until the extended filing deadline is upon them. This is not the case. Even though getting extensions has been made easier--individuals can obtain an automatic four-month extension by phone, the mail or computer, and an additional two months is granted for qualifying taxpayers--there are drawbacks, and certainly "no free rides."

When a taxpayer gets an extension to file his or her return, this does not mean that he or she has more time in which to pay any taxes that are owed without interest or penalty. An extension to file also does not extend the time for payment of taxes. Your ultimate tax liability is an official obligation that starts on April 15^th, 2008. You don't have to pay; but if you don't pay, interest charges (currently 7 percent, compounded daily) are applicable to any tax unpaid after the regular deadline. And that may only be the start.

If payments by the regular deadline are less than 90 percent of the actual 2007 tax, the IRS also has the right to asses a 0.5 percent per month late filing penalty. In addition, you must properly estimate the amount of total tax liability based on current information when filing for an extension. If the IRS later determines that estimate to be unreasonable, it can treat the extension as completely void and assess hefty failure-to-file penalties.

An extension, and not filing until October 15^th also means that you won't receive a stimulus rebate check (up to $600 for individuals and $1,200 for joint filers, not including any applicable $300 rebate for a qualifying child) until November or early December, rather than based on the May through July distribution schedule for those filing their 2007 returns by the regular April 15^th, 2008 deadline.

Some procedural pitfalls can also surprise taxpayers who had every intention of making a proper extension request. For example, if a husband and wife file separate returns, an automatic extension application filed by one does not give an extension of the filing time to the other.