Six Tips for Individuals who owe Income Taxes

1. Pay your tax bill.  If you get a bill from the IRS, you’ll save money by paying it as soon as you can. If you can’t pay it in full, you should pay as much as you can. That will reduce the interest and penalties charged for late payment. You should think about using a credit card or getting a loan to pay the amount you owe.

2. Use IRS Direct Pay.  The best way to pay your taxes is with the IRS Direct Pay tool. It’s the safe, easy and free way to pay from your checking or savings account. The tool walks you through five simple steps to pay your tax in one online session. Just click on the ‘Pay Your Tax Bill’ icon on the IRS home page.

3. Get a short-term extension to pay.  You may qualify for extra time to pay your taxes if you can pay in full in 120 days or less. You can apply online at IRS.gov. If you received a bill from the IRS you can also call the phone number listed on it. If you don’t have a bill, call 800-829-1040 for help. There is usually no set-up fee for a short-term extension.

4. Apply for a monthly payment plan.  If you owe $50,000 or less and need more time to pay, you can apply for an Online Payment Agreement on IRS.gov. A direct debit payment plan is your best option. This plan is the lower-cost, hassle-free way to pay. The set-up fee is less than other plans. There are no reminders, no missed payments and no checks to write and mail. You can also use Form 9465, Installment Agreement Request, to apply. For more about payment plan options visit IRS.gov.

5. Consider an Offer in Compromise.  An Offer in Compromise lets you settle your tax debt for less than the full amount that you owe. An OIC may be an option if you can’t pay your tax in full. It may also apply if full payment will cause a financial hardship. You can use the OIC Pre-Qualifier tool to see if you qualify. It will also tell you what a reasonable offer might be.

6. Change your withholding or estimated tax.  You may be able to avoid owing the IRS in the future by having more taxes withheld from your pay. Do this by filing a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer. The IRS Withholding Calculator on IRS.gov can help you fill out a new W-4. If you have income that’s not subject to withholding you may need to make estimated tax payments. See Form 1040-ES, Estimated Tax for Individuals for more on this topic.

To find out more see Publication 594, The IRS Collection Process. You can get this booklet on IRS.gov. You may also call 800-TAX-FORM to get it by mail.

Source:  www.IRS.gov

VOTE!!!

There are several very close races today.  So your VOTE will COUNT!!!  Even if you never voted before, today is definitely the day to VOTE!

If you like the direction the U.S. is headed today and want to keep it headed that way – then read a paper, watch something other than CNN or MSNBC, and find a Church!!!

If you don’t like the direction the U.S. is headed today and want to send a message to Washington to CHANGE the direction – then VOTE!!!  That is, if you are bothered by the $17+ Trillion in Debt, if you didn’t get to keep your doctor, if you didn’t get the $2,500 deduction in health insurance cost, then it is time to CHANGE back to the Conservative Christian Values that this country was built upon and HOPE that GOD forgives us!

VOTE!!!

Who Is A Minister For Tax Purposes?

A minister occupies a unique niche in the United State tax code. He or she is considered an employee for income tax purposes, but self-employed for social security and Medicare. In addition, a minister is eligible for a housing allowance that is not subject to income tax, and has the choice to opt out of social security and Medicare.

Because of this unique tax treatment accorded ministers, it is important that the individual be properly qualified as a minister in order to receive this that treatment. One is not classified as a minister just by claiming to be one. The IRS has not directly addressed the issue of who is a minister. However, five factors have emerged that must be considered:

1. The person must be ordained, licensed, or commissioned by a local church ordenomination.
2. The person will administer “sacerdotal functions.” That is, they must perform marriage and funeral services, dedicate infants, baptize believers, and serve communion.
3. The person will be considered a religious leader by the church or denomination.
4. The person will conduct religious worship.
5. The person will have management responsibilities in the control, conduct, or maintenance of the local church or religious denomination.

All five factors need not be present, the courts and the IRS generally use a balancing approach in making a determination. Only the first is inviolate, someone not ordained, licensed, or commissioned is not considered a minister. This requirement, however, is quite flexible. The ordination, licensing, or commissioning may be by a denomination or by an individual church. It is conceivable that someone could form a church and have this church ordain them. Different churches use different terminology, so the wording does not have to be precise, just some evidence of the church or denomination recognizing that the person is considered a minister by the church or denomination.

The balancing approach is flexible as many ministers of music, worship, youth, education, or administration may meet some of these criteria, but may not perform all five functions.

Performing sacerdotal functions involves activities such as performing marriage and funeral services, dedicating infants, baptizing believers, and serving communion. Obviously, some of these activities are not always performed by ministers, nor do some ministers engage in these functions. There is no requirement that the minister must be qualified to perform every sacramental function within the individual church. Generally this test will be met if the minister is qualified to perform some of them and does perform them on occasion.

Being considered a religious leader relates to both the role and how the members regard the minister. Is the minister generally looked upon by members and others as a religious leader? This would serve to exclude someone, for example, who is simply performing services of a routine nature such as clerical or janitorial duties. Job titles have little significance, the IRS is concerned that the minister perform religious duties.

Conducting religious worship is not narrowly defined. The senior pastor of a church would obviously qualify. But also, a youth pastor leading services for the youth group, a minister of music or worship who leads in the service would qualify, a minister of education who oversees the educational aspects of the church could be leading worship. In short, the definition here is not confined to the one hour on Sunday morning when the church gathers for the main worship service.

Having management responsibilities in the control, conduct, or maintenance of the local church or religious denomination is a broad definition that allows ministers in a local church, as well as denomination leaders to qualify as a minister. Obviously, any organization needs managerial oversight, and a minister working in that capacity could still be considered a minister.

It should be noted that many laypersons may fulfill the final four requirements as many churches may allow laypersons to perform some or all of these activities. That is what makes the ordination criteria so essential.

Ministers who are employed in a denominational capacity may be considered ministers, depending on the nature of their activities. For example, a minister employed by his denomination as a church planter would likely be qualified. The executive director of a denominational segment would qualify. However, a minister who is employed within the denomination does not automatically qualify. A professor who is an ordained minister teaching philosophy at a denominationally-affiliated university would not likely be considered as a minister for tax purposes.

An additional complication arises when an ordained minister is not serving a church but is an itinerant evangelist, a worker in a parachurch organization, or a denominational worker. These are evaluated on a case-by-case basis, but it is possible that such workers would qualify as ministers. It would be advisable if an itinerant minister work through a mission organization in order to help clarify his or her ministerial status. This could be an organization founded by the minister.

It is important that the minister be able to demonstrate that he or she qualifies as a minister for tax purposes. Otherwise, a great number of tax benefits may be lost.

Source:  TaxConnections

Electronic Payment System

The US Internal Revenue Service has established an electronic payment system suitable for individual taxpayers.

I tried the system for myself this year and found it quite easy.  (At least easier than writing out a check and snail mailing it to the IRS.)

You simply sign on to the IRS e-file system at www.EFTPS.gov and create your account.  That is, select the big red “Enroll” button.

After you create your account, it takes 5 business days for the IRS to send to you via snail mail the log in info.  After I received my log in info I was quickly able to sign into the system and make my estimated quarterly payment.

This would also be useful when making extension payments.  But we must have our account created before the due dates – so log in today and establish your account.

US Tax Effect of Same-Sex Marriage

IR-2013-72, Aug. 29, 2013

WASHINGTON — The U.S. Department of the Treasury and the Internal Revenue Service (IRS) ruled on Aug 29, 2013 that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

Source: IRS.gov

However, each state will not necessary follow these federal guidelines.  For example, the Georgia Department of Revenue issued guidance, Informational Bulletin IT-2013-10-25, instructing same-sex couples to continue filing state income tax returns as if they were single.

If the person is in a same-sex marriage and a married filing jointly or married filing separately status was used on a Federal return, the person must:

  • For Georgia purposes, recompute Federal Adjusted Gross Income and itemized deductions (if applicable) as if the person had filed a single Federal return.
  • On Georgia Form 500 use single filing status or, if qualified, head of household filing status.
  • Use the single/head of household exemption amount and the single/head of household standard deduction (if applicable).
  • Use single tax rates, or if qualified, head of household tax rates.

This applies to all taxable years. Although amended returns may be filed for Federal tax purposes to change the filing status to married filing jointly or married filing separately, no amended returns may be filed for Georgia to change the filing status.

Source:  GADOR.gov

October 15th Deadline Remains in Effect

October 15th Deadline Remains in Effect for Taxpayers Who Requested a Six-month Extension to File Tax Return

The Internal Revenue Service today reminded taxpayers that the Oct. 15 deadline remains in effect for people who requested a six-month extension to file their tax return.

The current lapse in federal appropriations does not affect the federal tax law, and all taxpayers should continue to meet their tax obligations as normal. Individuals and businesses should keep filing their tax returns and making deposits with the IRS, as required by law.

Read more about extensions here - http://gemms.us/tax-extensions

Simplified Option for Home Office Deduction

Do you work from home? If so, you may be familiar with the home office deduction, available for taxpayers who use their home for business. Beginning this year, there is a new, simpler option to figure the business use of your home.

This simplified option does not change the rules for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements. The new option can save you a lot of time and will require less paperwork and recordkeeping.

Here are six facts the IRS wants you to know about the new, simplified method to claim the home office deduction.

1. You may use the simplified method when you file your 2013 tax return next year. If you use this method to claim the home office deduction, you will not need to calculate your deduction based on actual expenses. You may instead multiply the square footage of your home office by a prescribed rate.

2. The rate is $5 per square foot of the part of your home used for business. The maximum footage allowed is 300 square feet. This means the most you can deduct using the new method is $1,500 per year.

3. You may choose either the simplified method or the actual expense method for any tax year. Once you use a method for a specific tax year, you cannot later change to the other method for that same year.

4. If you use the simplified method and you own your home, you cannot depreciate your home office. You can still deduct other qualified home expenses, such as mortgage interest and real estate taxes. You will not need to allocate these expenses between personal and business use. This allocation is required if you use the actual expense method. You’ll claim these deductions on Schedule A, Itemized Deductions.

5. You can still fully deduct business expenses that are unrelated to the home if you use the simplified method. These may include costs such as advertising, supplies and wages paid to employees.

6. If you use more than one home with a qualified home office in the same year, you can use the simplified method for only one in that year. However, you may use the simplified method for one and actual expenses for any others in that year.

Source:  http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Simplified-Option-for-Home-Office-Deduction

3.8% Sales Tax on Home Sales – More on ObamaCare

Starting in 2013, the health care bill does impose a 3.8% Medicare tax on high-income taxpayers who exceed a total household net-investment income — a total which could conceivably include some of the proceeds from a home sale. However, while this Medicare tax will be applied to households with an adjusted gross income of $200,000 or more for individuals, or $250,000 or more for married couples, it typically won’t include capital gains resulting from the sale of a home, providing that home is a primary residence and not a vacation or rental home.

Why? Because the capital gains tax exclusion rule for sales of a primary home — $250,000 for individuals and $500,000 for couples — will remain. In other words, if the profit realized from the sale of the home falls below those capital gains exclusion totals, then it can’t be tacked on to that household’s net-investment income tally. Hence, that 3.8% Medicare tax would not apply.

If the gains from the sale of the house do exceed the $250,000 or $500,000 thresholds, they will be added to the household’s net-income total, which is subject to that 3.8% Medicare tax. All told, however, that tax will fall on a relative few — typically, households with large incomes from other sources. Any revenue collected through the Medicare tax, by the way, goes to the Medicare hospital insurance program.

If you do happen to be in that high-income bracket and own one of those scant few homes in which your sale profits are likely to greatly exceed the capital gains limits, you won’t have to worry about that Medicare tax anyway unless you wait until next year or later to sell. Even if you should decide to sell in 2013 or after, the issue may be moot by then if the Supreme Court shoots down parts or all of the legislation this year.

Most likely though, that Medicare tax will not affect you in any way. Good luck on your sale!

Source: FoxBusiness

Read more about the 3.8% Medicare Investment Surtax – HERE

IRS to Accept Returns Claiming Education Credits by Mid-February

IR-2013-10, Jan. 28, 2013

WASHINGTON — As preparations continue for the Jan. 30 opening of the 2013 filing season for most taxpayers, the Internal Revenue Service announced today that processing of tax returns claiming education credits will begin by the middle of February.

Taxpayers using Form 8863, Education Credits, can begin filing their tax returns after the IRS updates its processing systems. Form 8863 is used to claim two higher education credits — the American Opportunity Tax Credit and the Lifetime Learning Credit.

The IRS emphasized that the delayed start will have no impact on taxpayers claiming other education-related tax benefits, such as the tuition and fees deduction and the student loan interest deduction. People otherwise able to file and claiming these benefits can start filing Jan. 30.

As it does every year, the IRS reviews and tests its systems in advance of the opening of the tax season to protect taxpayers from processing errors and refund delays. The IRS discovered during testing that programming modifications are needed to accurately process Forms 8863.  Filers who are otherwise able to file but use the Form 8863 will be able to file by mid-February. No action needs to be taken by the taxpayer or their tax professional.  Typically through the mid-February period, about 3 million tax returns include Form 8863, less than a quarter of those filed during the year.

The IRS remains on track to open the tax season on Jan. 30 for most taxpayers. The Jan. 30 opening includes people claiming the student loan interest deduction on the Form 1040 series or the higher education tuition or fees on Form 8917, Tuition and Fees Deduction. Forms that will be able to be filed later are listed on IRS.gov.

Source:  http://www.irs.gov/uac/Newsroom/IRS-To-Accept-Returns-Claiming-Education-Credits-by-Mid-February

Simplified Home Office Deduction Starting This Year

IRS Announces Simplified Option for Claiming Home Office Deduction Starting This Year; Eligible Home-Based Businesses May Deduct up to $1,500; Saves Taxpayers 1.6 Million Hours A Year

IR-2013-5, Jan. 15, 2013

WASHINGTON — The Internal Revenue Service today announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.

In tax year 2010, the most recent year for which figures are available, nearly 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction).

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” said Acting IRS Commissioner Steven T. Miller. “The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013.”

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

Source:  http://www.irs.gov/uac/Newsroom/Simplified-Option-for-Claiming-Home-Office-Deduction-Starting-This-Year

IRS Plans Jan. 30 Tax Season Opening For Tax Year 2012 Form 1040 Filers

IR-2013-2, Jan. 8, 2013

WASHINGTON — Following the January tax law changes made by Congress under the American Taxpayer Relief Act (ATRA), the Internal Revenue Service announced today it plans to open the 2013 filing season and begin processing individual income tax returns on Jan. 30.

The IRS will begin accepting tax returns on that date after updating forms and completing programming and testing of its processing systems. This will reflect the bulk of the late tax law changes enacted Jan. 2. The announcement means that the vast majority of tax filers — more than 120 million households — should be able to start filing tax returns starting Jan 30.

The IRS estimates that remaining households will be able to start filing in late February or into March because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline or obtain an extension.

“We have worked hard to open tax season as soon as possible,” IRS Acting Commissioner Steven T. Miller said. “This date ensures we have the time we need to update and test our processing systems.”

The IRS will not process paper tax returns before the anticipated Jan. 30 opening date. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit.

“The best option for taxpayers is to file electronically,” Miller said.

The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on Jan. 1, 2013, with many affecting tax returns for 2012. While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it can begin accepting tax returns.

The IRS originally planned to open electronic filing this year on Jan. 22; more than 80 percent of taxpayers filed electronically last year.

Who Can File Starting Jan. 30?

The IRS anticipates that the vast majority of all taxpayers can file starting Jan. 30, regardless of whether they file electronically or on paper. The IRS will be able to accept tax returns affected by the late Alternative Minimum Tax (AMT) patch as well as the three major “extender” provisions for people claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

Who Can’t File Until Later?

There are several forms affected by the late legislation that require more extensive programming and testing of IRS systems. The IRS hopes to begin accepting tax returns including these tax forms between late February and into March; a specific date will be announced in the near future.

The key forms that require more extensive programming changes include Form 5695 (Residential Energy Credits), Form 4562 (Depreciation and Amortization) and Form 3800 (General Business Credit). A full listing of the forms that won’t be accepted until later is available on IRS.gov.

As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure as smooth a tax season as possible under the circumstances.

Source:  http://www.irs.gov/uac/Newsroom/IRS-Plans-Jan.-30-Tax-Season-Opening-For-1040-Filers

“Fiscal cliff” legislation includes huge number of tax provisions

Here are the act’s main tax features:

Individual tax rates

All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

Phaseout of itemized deductions and personal exemptions

The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.

Capital gains and dividends

A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.

Alternative minimum tax

The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.

Estate and gift tax

The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.

Permanent extensions

Various temporary tax provisions enacted as part of EGTRRA were made permanent. These include:

  • Marriage penalty relief (i.e., the increased size of the 15% rate bracket (Sec. 1(f)(8)) and increased standard deduction for married taxpayers filing jointly (Sec. 63(c)(2));
  • The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one) (Sec. 21);
  • The exclusion for National Health Services Corps and Armed Forces Health Professions Scholarships (Sec. 117(c)(2));
  • The exclusion for employer-provided educational assistance (Sec. 127);
  • The enhanced rules for student loan deductions introduced by EGTRRA (Sec. 221);
  • The higher contribution amount and other EGTRRA changes to Coverdell education savings accounts (Sec. 530);
  • The employer-provided child care credit (Sec. 45F);
  • Special treatment of tax-exempt bonds for education facilities (Sec 142(a)(13));
  • Repeal of the collapsible corporation rules (Sec. 341);
  • Special rates for accumulated earnings tax and personal holding company tax (Secs. 531 and 541); and
  • Modified tax treatment for electing Alaska Native Settlement Trusts (Sec. 646).


Individual credits expired at the end of 2012

The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2018. Other credits and items from the American Recovery and Reinvestment Act of 2009, P.L. 111-5, that were extended for the same five-year period include enhanced provisions of the child tax credit under Sec. 24(d) and the earned income tax credit under Sec. 32(b). In addition, the bill permanently extends a rule excluding from taxable income refunds from certain federal and federally assisted programs (Sec. 6409).

Individual provisions expired at the end of 2011

The act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011:

  • Deduction for certain expenses of elementary and secondary school teachers (Sec. 62);
  • Exclusion from gross income of discharge of qualified principal residence indebtedness (Sec. 108);
  • Parity for exclusion from income for employer-provided mass transit and parking benefits (Sec. 132(f));
  • Mortgage insurance premiums treated as qualified residence interest (Sec. 163(h));
  • Deduction of state and local general sales taxes (Sec. 164(b));
  • Special rule for contributions of capital gain real property made for conservation purposes (Sec. 170(b));
  • Above-the-line deduction for qualified tuition and related expenses (Sec. 222); and
  • Tax-free distributions from individual retirement plans for charitable purposes (Sec. 408(d)).


Business tax extenders

The act also extended many business tax credits and other provisions. Notably, it extended through 2013 and modified the Sec. 41 credit for increasing research and development activities, which expired at the end of 2011. The credit is modified to allow partial inclusion in qualified research expenses and gross receipts those of an acquired trade or business or major portion of one. The increased expensing amounts under Sec. 179 are extended through 2013. The availability of an additional 50% first-year bonus depreciation (Sec. 168(k)) was also extended for one year by the act. It now generally applies to property placed in service before Jan. 1, 2014 (Jan. 1, 2015, for certain property with longer production periods).

Other business provisions extended through 2013, and in some cases modified, are:

  • Temporary minimum low-income tax credit rate for non-federally subsidized new buildings (Sec. 42);
  • Housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds (Section 3005 of the Housing Assistance Tax Act of 2008);
  • Indian employment tax credit (Sec. 45A);
  • New markets tax credit (Sec. 45D);
  • Railroad track maintenance credit (Sec. 45G);
  • Mine rescue team training credit (Sec. 45N);
  • Employer wage credit for employees who are active duty members of the uniformed services (Sec. 45P);
  • Work opportunity tax credit (Sec. 51);
  • Qualified zone academy bonds (Sec. 54E);
  • Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Sec. 168(e));
  • Accelerated depreciation for business property on an Indian reservation (Sec. 168(j));
  • Enhanced charitable deduction for contributions of food inventory (Sec. 170(e));
  • Election to expense mine safety equipment (Sec. 179E);
  • Special expensing rules for certain film and television productions (Sec. 181);
  • Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (Sec. 199(d));
  • Modification of tax treatment of certain payments to controlling exempt organizations (Sec. 512(b));
  • Treatment of certain dividends of regulated investment companies (Sec. 871(k));
  • Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Act (Sec. 897(h));
  • Extension of subpart F exception for active financing income (Sec. 953(e));
  • Lookthrough treatment of payments between related controlled foreign corporations under foreign personal holding company rules (Sec. 954);
  • Temporary exclusion of 100% of gain on certain small business stock (Sec. 1202);
  • Basis adjustment to stock of S corporations making charitable contributions of property (Sec. 1367);
  • Reduction in S corporation recognition period for built-in gains tax (Sec. 1374(d));
  • Empowerment Zone tax incentives (Sec. 1391);
  • Tax-exempt financing for New York Liberty Zone (Sec. 1400L);
  • Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands (Sec. 7652(f)); and
  • American Samoa economic development credit (Section 119 of the Tax Relief and Health Care Act of 2006, P.L. 109-432, as modified).


Energy tax extenders

The act also extends through 2013, and in some cases modifies, a number of energy credits and provisions that expired at the end of 2011:

  • Credit for energy-efficient existing homes (Sec. 25C);
  • Credit for alternative fuel vehicle refueling property (Sec. 30C);
  • Credit for two- or three-wheeled plug-in electric vehicles (Sec. 30D);
  • Cellulosic biofuel producer credit (Sec. 40(b), as modified);
  • Incentives for biodiesel and renewable diesel (Sec. 40A);
  • Production credit for Indian coal facilities placed in service before 2009 (Sec. 45(e)) (extended to an eight-year period);
  • Credits with respect to facilities producing energy from certain renewable resources (Sec. 45(d), as modified);
  • Credit for energy-efficient new homes (Sec. 45L);
  • Credit for energy-efficient appliances (Sec. 45M);
  • Special allowance for cellulosic biofuel plant property (Sec. 168(l), as modified);
  • Special rule for sales or dispositions to implement Federal Energy
  • Regulatory Commission or state electric restructuring policy for qualified electric utilities (Sec. 451); and
  • Alternative fuels excise tax credits (Sec. 6426).


Foreign provisions

The IRS’s authority under Sec. 1445(e)(1) to apply a withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons is made permanent, and the amount is increased to 20%.

New taxes

In addition to the various provisions discussed above, some new taxes also took effect Jan. 1 as a result of 2010’s health care reform legislation.

Additional hospital insurance tax on high-income taxpayers. The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.

Medicare tax on investment income. Starting Jan. 1, Sec. 1411 imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (AGI) exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.

For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000.

Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.

Medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.

Flexible spending arrangement. Effective for cafeteria plan years beginning after Dec. 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500.

Source:  http://www.journalofaccountancy.com/News/20137097.htm

“Dirty Dozen” Tax Scams

IRS Commissioner Doug Shulman recently stated “taxpayers should be careful and avoid falling into a trap with the Dirty Dozen. Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money. Don’t be fooled by these scams.”

The Dirty Dozen are the 12 most prevalent scams detected by the IRS. Taxpayers should take precautions to avoid these and other suspicious activities of scam artists. The following scams make up the IRS’s 2012 “Dirty Dozen” listing.

  1. Identity Theft. Topping this year’s list is identity theft. The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.
  2. Phishing. Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure potential victims and prompt them to provide valuable personal and financial information that can be used to commit identity or financial theft.
  3. Return Preparer Fraud. Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services, and attract new clients by promising guaranteed or inflated refunds.
  4. Hiding Income Offshore. Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in off-shore accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities, or insurance plans.
  5. “Free Money.” Scammers have been preying on low-income individuals and the elderly by posting flyers in community churches promising that tax returns can be filed with little or no documentation to receive “free money” from the IRS or Social Security Administration.
  6. False/Inflated Income and Expenses. This tactic is used by scam artists who file false or misleading returns to claim refunds they are not entitled to receive. One popular scam is to report income that was never earned to obtain refundable credits.
  7. False Form 1099 Refund Claims. In this scam, the perpetrator files a fake information return reporting false with-holding amounts that are subsequently used to file erroneous refund claims.
  8. Frivolous Arguments. Frivolous scheme promoters encourage people to make unreasonable and unfounded claims to avoid paying taxes.
  9. Falsely Claiming Zero Wages. Filing a phony wage-related or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed.
  10. Abuse of Charitable Organizations and Deductions. Misuses of tax-exempt organizations include arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property, and overvaluation of contributed property.
  11. Disguised Corporate Ownership. In this scam, domestic corporations and other entities are formed to disguise the ownership of a business. They are then used to under-report income, claim fictitious deductions, avoid the filing of tax returns, or participate in listed transactions, money laundering, financial crimes, and even terrorist financing.
  12. Misuse of Trusts. Unscrupulous promoters have urged taxpayers to transfer assets into trusts, promising reduced taxable income, deductions for personal expenses, and reduced estate or gift taxes that don’t deliver as promised.

Maximizing the Deduction for Start-Up Expenses

Individuals starting a new business or acquiring the assets of an existing business often incur start-up expenses, which can be considerable, in the investigation and acquisition phase before actual business operations begin.  Most start-up expenditures can be segregated into two broad categories (a) investigatory expenses and (b) business pre-opening costs.

Taxpayers can immediately deduct up to $5,000 of start-up expenses in the year when active conduct of a business begins. However, the $5,000 instant deduction allowance is reduced dollar for dollar by cumulative start-up expenses in excess of $50,000 for the business in question. Start-up expenses that cannot be immediately deducted in the year a business begins must be capitalized and amortized over 180 months on a straight-line basis. In many cases, start-up expenses for small businesses will be modest enough to qualify for immediate deduction under the $5,000 instant deduction allowance in the year when active conduct of business commences.

Example: Claiming the deduction for start-up expenses.

Suzie (a calendar-year taxpayer) incurs $4,200 of start-up expenses in 2012 before opening her new car wash in November of 2012. Suzie’s 2012 deduction is $4,200. Since her start-up expenses did not exceed $50,000, she can deduct the entire $4,200 in 2012.

Note: A taxpayer is not considered to be engaged in carrying on a trade or business until the business has begun to function as a going concern and has performed the activities for which it was organized.

4th Quarter 2012 US Federal Estimates

Timing is everything and the IRS has chosen a particularly inauspicious time to close the Atlanta lock boxes used by taxpayers living in Georgia, South Carolina, Alabama, Tennessee, Kentucky, North Carolina, Missouri, New Jersey, and Virginia to mail their federal estimated tax payments. The IRS has recently announced that effective January 1, 2013, the Atlanta lockbox will be closed and all those taxpayers will mail payments to a lockbox located in Louisville, Kentucky instead.  For those of you with nothing to file until your 2012 Form 1040 is completed, there is nothing to worry about.  The filing instructions you receive with your return will reflect the correct Louisville address.

If you have a fourth quarter 2012 federal estimated payment due by January 15, 2013, the transmittal letter we provided to you has the old address and should not be used.  Instead, you should mail your fourth quarter federal estimated payment to:

Internal Revenue Service
P.O. Box 1100
Louisville, KY 40293-1100

If you forget and mail the estimated payment to the Atlanta lock box, it should be forwarded, but it could arrive late.  Please note that this change only affects your federal estimated payment. There has been no mailing address change for state estimated payments.

Tax Rate Update

For the past several years, year-end tax planning has been a challenge for so many people.  Trying to anticipate whether Congress will act to extend some or all of the Bush tax cuts has been the cause of many a sleepless night for tax advisors.  The HIRE Act had small business in an uproar over the possibility of expanded reporting requirements on Form 1099.  Not only would businesses have to report payments to service providers and a few other limited transaction types, they would have been required to report on product purchases, as well.  Then came the Patient Protection and Affordable Care Act (Obamacare).   In this mammoth piece of legislation, we are seeing a series of new taxes that are to be implemented over several years.  As with the ultimate repeal of the expanded Form 1099 reporting in the HIRE Act, there is afoot an effort to repeal some of the new taxes from Obamacare.  Success in repeal will more than likely be far less successful.

THE RUNDOWN:

Bush Tax Cuts – The inevitability of the Bush tax cuts has to be that taxes will go up, whether 1) it is across the board, because Congress again will not come to an agreement or 2) They do agree and extend the cuts for taxpayers in all but the highest bracket.  Following is a comparison of the tax brackets, with and without the Bush cuts:

  Current After Lapse
Wages 10% 15%
  25% 28%
  28% 31%
  33% 36%
  35% 39.6%
     
Qualified Dividends 15% Taxpayer’s Highest Marginal Wage Rate
     
Capital Gains 0 or 15% Maximum 20%

In addition, the Child Tax Credit will drop from $1000 to $500 per child, and the Personal Exemption phase out will be reinstated on income above $122,500.

Obamacare – Following are the tax increases slated for implementation under this legislation for tax year 2013:

Medical Device Manufacturers – This one is similar to the infamous tanning bed tax.  It is a 2.3% excise tax that will be imposed on sales by manufacturers of medical devices.  This, in effect, acts like a national sales tax, because it is imposed on the gross receipts of a transaction regardless of the profitability of the company.

Medical Expense Deduction – The longstanding deduction for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income will now be limited to amounts that exceed 10% of adjusted gross income.   The increase does not apply to taxpayers over the age of 65, until the year 2016.

Flexible Spending Accounts (FSA) – If your company has an FSA, through which you can contribute pre-tax dollars for otherwise unreimbursed medical expenses, those contributions will be limited to $2500.

Investment Income Surtax – For households earning greater than $250,000 per year ($200,000 for single taxpayers), there will be a 3.8% surtax on the lower of investment income or income that exceeds the aforementioned earnings.  Generally speaking, investment income consists of interest, dividends and capital gains.  Keep in mind the above discussion regarding the lapse of the Bush tax cuts.  If the Bush tax cuts lapse, high income taxpayers’ tax rates on dividends and capital gains could be 43.4% and 23.8% respectively.

Medicare Payroll Tax – Currently, wage earners and self-employed taxpayers are subject to the Medicare tax, alongside the Social Security tax.  Beginning in 2013, those with wage or self-employment earnings greater than – you guessed it – $250,000 married ($200,000 single) will see the overall Medicare tax increase from 2.9% to 3.8%.

Other – The Payroll tax holiday is over, as well.  For the past two years, everyone subject to the Social Security tax has seen their share of Social Security contributions decreased from 6.2% to 4.2%.  Beginning in 2013, the 6.2% rate will be reinstated.

One good thing is that the 401K contribution limitations will increase from $17,000 to $17,500 and the catchup provision for taxpayers age 50 and over will increase from $5,000 to $5,500.  I presume this is of little consolation, given the rest.

TAKEAWAY:
This year could finally be the time to accelerate earnings at year end, the antithetical plan from what tax practitioners have advised for many years.

Expiration of Bush Tax Cuts

The tax law changes – commonly referred to as the “Bush tax cuts” – are scheduled to expire on January 1, 2013.  If Congress fails to extend them, many Americans will experience a tax increase.  Many are skeptical that Congress – which has not moved on extending the cuts in two years – will take action before the presidential election.  Some believe that once the election is over, Congress will not have the political will to make changes to the tax code.

Read more here – http://uspolitics.einnews.com/247pr/304358

As always please feel free to contact us if you have any problems, questions, or concerns.

0.9% Medicare Surtax on High Income Earners

Under the Affordable Care Act, effective January 1, 2013, there is an increase in Medicare tax for certain high earners.  An individual is liable for the additional tax to the extent his or her wages, other compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the following threshold amounts for the individual’s filing status:

Filing Status Threshold Amount
Married filing jointly  $250,000
Married filing separately $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $200,000

Read more here -

http://www.grafinsurance.com/wp-content/uploads/2012/05/Additional-Medicare-Tax-081612R.pdf

3.8% Medicare Surtax on Investment Income

Beginning in 2013, certain investment income will be subject to an additional 3.8% surtax, enacted as part of the Health Care and Education Reconciliation Act of 2010.  This is sometimes referred to as the “Medicare” surtax because the legislation enacting this tax created a new section of the tax code entitled: “Chapter 2A – Unearned Income Medicare Contribution.” However, this was simply a revenue-raiser enacted to offset the cost of health care legislation; there does not appear to be any reason this surtax must be used for Medicare.

Read more here -
http://www.ustrust.com/Publish/Content/application/pdf/GWMOL/3.8_Medicare_Surtax.pdf