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Yesterday, the President signed the American Taxpayer Relief Act, which was passed on New Year’s Day. Here is brief summary of selected portions of it, for your review. We can help answer any questions that you may have.
Individual Tax Rates
The Act preserves and permanently extends the Bush-era income tax cuts except for single individuals with taxable income above $400,000; married couples filing joint returns with taxable income above $450,000; and heads of household with taxable income above $425,000. Income above these thresholds will be taxed at a 39.6 percent rate, effective January 1, 2013. The $400,000/$450,000/$425,000 thresholds will be adjusted for inflation after 2013.
The new law, however, does not extend the payroll tax holiday. Effective January 1, 2013, the employee-share of Social Security tax withholding increased from 4.2% to 6.2% (its rate before the payroll tax holiday).
Capital Gains and Dividend Tax Rate
Effective January 1, 2013, the maximum tax rate on qualified capital gains and dividends rises from 15 to 20 percent for taxpayers whose taxable incomes exceed the thresholds set for the 39.6 percent rate (the $400,000/$450,000/$425,000 thresholds discussed above). The maximum tax rate for all other taxpayers remains at 15 percent; and moreover, a zero-percent rate will continue to apply to qualified capital gains and dividends to the extent income falls below the top of the 15- percent tax bracket. Note – The 2010 Affordable Care Act imposes a 3.8% Medicare tax on interest, dividends, capital gains, and other passive income, starting in 2013, and it applies at taxable income over $200,000 for single filers and over $250,000 for joint filers.
Estate and Gift Tax
Federal transfer taxes (estate, gift and generation-skipping transfer (GST) taxes) seem to have been in a constant state of flux in recent years. The Act provides some certainty. Effective January 1, 2013, the maximum estate, gift and GST tax rate is generally 40 percent, which reflects an increase from 35 percent for 2012. The lifetime exclusion amount for estate and gift taxes is unchanged for 2013 and subsequent years at $5 million (adjusted for inflation). The GST exemption amount for 2013 and beyond is also $5 million (adjusted for inflation). The new law also makes permanent portability and some enhancements made in previous tax laws.
Other Act Elements Affecting Individuals
• AMT (Alternative Minimum Tax) – Higher exemptions are made permanent, and indexed for inflation
• IRA distributions to charitable organizations, (for those over age 70) – restored through 2013
• Exclusion for cancellation of debt on principal residence – extended through 2013
• Reduction of itemized deductions for incomes over certain levels, (which was not in place since 2010) – will apply starting in 2013
Business Tax Provisions
Code Sec. 179 business equipment expensing. In recent years, Congress has repeatedly increased dollar and investment limits under Code Sec. 179 to encourage spending by businesses. For tax years beginning in 2010 and 2011, the Code Sec. 179 dollar and investment limits were $500,000 and $2 million, respectively. [This means that you can expense up to $500,000 of equipment or software purchased, so long as you don’t spend more than $2 million in total. Expenditures over the $2 million level reduces the allowable expense amount dollar-for-dollar.] The Act restores the dollar and investment limits for 2012 and 2013 to their 2011 amounts ($500,000 and $2 million) and adjusts those amounts for inflation. However, this increase is temporary. The Code Sec. 179 dollar and investment limits are scheduled, unless changed by Congress, to decrease to $25,000 and $200,000, respectively, after 2013. The new law also provides that off-the-shelf computer software qualifies as eligible property for Code Sec. 179 expensing. The software must be placed in service in a tax year beginning before 2014. Additionally, the Act allows taxpayers to treat up to $250,000 of qualified leasehold and retail improvement property as well as qualified restaurant property, as eligible for Code Sec. 179 expensing.
Bonus depreciation. Bonus depreciation of business equipment is one of the most important tax benefits available to businesses, large or small. In recent years, bonus depreciation has reached 100 percent, which gave taxpayers the opportunity to write off 100 percent of qualifying asset purchases immediately. For 2012, bonus depreciation remained available but was reduced to 50 percent. The Act extends 50 percent bonus depreciation through 2013. The Act also provides that a taxpayer otherwise eligible for additional first-year depreciation may elect to claim additional research or minimum tax credits in lieu of claiming depreciation for qualified property.
While not quite as attractive as 100 percent bonus depreciation, 50 percent bonus depreciation is valuable. For example, a $100,000 piece of equipment with a five-year MACRS life would qualify for a $55,000 write-off: $50,000 in bonus depreciation plus 20 percent of the remaining $50,000 in basis as “regular” depreciation, with the half-year convention applied in the first and last year.
Bonus depreciation also relates to the passenger vehicle depreciation dollar limits under Code Sec. 280F. This provision imposes dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile/truck in service within a business and for each succeeding year. Because of the new law, the first-year depreciation cap for passenger automobile/truck placed in service in 2013 is increased by $8,000.
Bonus depreciation, unlike Code Sec. 179 expensing, is not capped at a dollar threshold. However, only new property qualifies for bonus depreciation. Code Sec. 179 expensing, in contrast, can be claimed for both new and used property and qualifying property may be expensed at 100 percent.
Research Tax Credit. The research tax credit was restored for 2012 and extended through 2013.
If you have any questions, please contact us.
If you have a gain from the sale of your main home, you may be able to exclude all or part of that gain from your income.
Here are 10 tips to keep in mind when selling your home.
1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
3. You are not eligible for the full exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
4. If you can exclude all of the gain, you do not need to report the sale of your home on your tax return.
5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
6. You cannot deduct a loss from the sale of your main home.
7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude. Most tax software can also help with
8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
9. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523, Selling Your Home, for details.
10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.
For more information about selling your home, see IRS Publication 523,Selling Your Home.
Publication 523, Selling Your Home (PDF)
Form 8822, Change of Address (PDF)
Tax Topic 701 – Sale of Your Home
Real Estate Tax Tips – Sale of Residence
Don’t Overlook the Benefits of Miscellaneous Deductions
If you are able to itemize your deductions on your tax return instead of claiming the standard deduction, you may be able to claim certain miscellaneous deductions. A tax deduction reduces the amount of your taxable income and generally reduces the amount of taxes you may have to pay.
Here are some things you should know about miscellaneous tax deductions:
Deductions Subject to the 2 Percent Limit. You can deduct the amount of certain miscellaneous expenses that exceed 2 percent of your adjusted gross income. Deductions subject to the 2 percent limit include:
Unreimbursed employee expenses such as searching for a new job in the same profession, certain work clothes and uniforms, work tools, union dues, and work-related travel and transportation.
Tax preparation fees.
Other expenses that you pay to:
– Produce or collect taxable income,
– Manage, conserve, or maintain property held to produce taxable income, or
– Determine, contest, pay, or claim a refund of any tax.
Examples of other expenses include certain investment fees and expenses, some legal fees, hobby expenses that are not more than your hobby income and rental fees for a safe deposit box if it is not used to store jewelry and other personal effects.
Deductions Not Subject to the 2 Percent Limit. The list of deductions not subject to the 2 percent limit of adjusted gross income includes:
Casualty and theft losses from income-producing property such as damage or theft of stocks, bonds, gold, silver, vacant lots, and works of art.
Gambling losses up to the amount of gambling winnings.
Impairment-related work expenses of persons with disabilities.
Losses from Ponzi-type investment schemes.
Qualified miscellaneous deductions are reported on Schedule A, Itemized Deductions. Keep records of your miscellaneous deductions to make it easier for you to prepare your tax return when the filing season arrives.
There are also many expenses that you cannot deduct such as personal living or family expenses. You can find more information and examples in IRS Publication 529, Miscellaneous Deductions, which is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Publication 529, Miscellaneous Deductions (PDF)
Tax Topic 508 – Miscellaneous Expenses
Schedule A Itemized Deductions (PDF)
Instructions for Schedule A (PDF)
Stacie Kitts, CPA Tax Partner Katherman Kitts & Co. LLP
May is almost over and June represents another big filing deadline for persons who have foreign bank accounts and investments. So here is your reminder. Your FBAR Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts is due at the IRS office – not mailed by – but received in their office by June 30. Don’t forget, the penalty for not filing this form is scary.
Also, if you are doing it yourself or hired a person who is not familiar with foreign reporting requirements, you might want to familiarize yourself with the chart below – prepared by our friendly IRS for your viewing pleasure.
The new Form 8938 Statement of Specified Foreign Assets is due with your tax return but not later than the extended due date should you decide for some crazy reason that you don’t want to file your tax return by the due date. Don’t blow this off either, as the penalty for not filing is just as scary as the FBAR.
Comparison of Form 8938 and FBAR Requirements
**Unmarried taxpayer living in the United States. If you are not married and not living abroad, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
- More On IRS Form 8938 vs. FBAR (forbes.com)
- Is Closing Foreign Bank Accounts An Alternative To Disclosure? (forbes.com)
- Last week at my other blog: Foreign account reporting; E-file fears grow (dontmesswithtaxes.typepad.com)
- Relinquishing U.S. Citizenship (forbes.com)
WASHINGTON — The Internal Revenue Service today announced a major expansion of its “Fresh Start” initiative to help struggling taxpayers by taking steps to provide new penalty relief to the unemployed and making Installment Agreements available to more people.
Under the new Fresh Start provisions, part of a broader effort started at the IRS in 2008, certain taxpayers who have been unemployed for 30 days or longer will be able to avoid failure-to-pay penalties. In addition, the IRS is doubling the dollar threshold for taxpayers eligible for Installment Agreements to help more people qualify for the program.
“We have an obligation to work with taxpayers who are struggling to make ends meet,” said IRS Commissioner Doug Shulman. ”This new approach makes sense for taxpayers and for the nation’s tax system, and it’s part of a wider effort we have underway to help struggling taxpayers.”
The IRS announced plans for new penalty relief for the unemployed on failure-to-pay penalties, which are one of the biggest factors a financially distressed taxpayer faces on a tax bill.
To assist those most in need, a six-month grace period on failure-to-pay penalties will be made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by Oct. 15, 2012.
The penalty relief will be available to two categories of taxpayers:
- Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
- Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.
This penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.
Taxpayers meeting the eligibility criteria will need to complete a new Form 1127A to seek the 2011 penalty relief. The new form is available on IRS.gov.
The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until Oct. 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.
Even with the new penalty relief becoming available, the IRS strongly encourages taxpayers to file their returns on time by April 17 or file for an extension. Failure-to-file penalties applied to unpaid taxes remain in effect and are generally 5 percent per month, also with a 25 percent cap.
The Fresh Start provisions also mean that more taxpayers will have the ability to use streamlined installment agreements to catch up on back taxes.
The IRS announced today that, effective immediately, the threshold for using an installment agreement without having to supply the IRS with a financial statement has been raised from $25,000 to $50,000. This is a significant reduction in taxpayer burden.
Taxpayers who owe up to $50,000 in back taxes will now be able to enter into a streamlined agreement with the IRS that stretches the payment out over a series of months or years. The maximum term for streamlined installment agreements has also been raised to 72 months from the current 60-month maximum.
Taxpayers seeking installment agreements exceeding $50,000 will still need to supply the IRS with a Collection Information Statement (Form 433-A or Form 433-F). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of this payment option.
An installment agreement is an option for those who cannot pay their entire tax bills by the due date. Penalties are reduced, although interest continues to accrue on the outstanding balance. In order to qualify for the new expanded streamlined installment agreement, a taxpayer must agree to monthly direct debit payments.
Taxpayers can set up an installment agreement with the IRS by going to the On-line Payment Agreement (OPA) page on IRS.gov and following the instructions.
These changes supplement a number of efforts to help struggling taxpayers, including the “Fresh Start” program announced last year. The initiative includes a variety of changes to help individuals and businesses pay back taxes more easily and with less burden, including the issuance of fewer tax liens.
“Our goal is to help people meet their obligations and get back on their feet financially,” Shulman said.
Input from the Internal Revenue Service Advisory Council and the IRS National Taxpayer Advocate’s office contributed to the formulation of Fresh Start.
Offers in Compromise
Under the first round of Fresh Start, the IRS expanded a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.
The IRS recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place more common-sense changes to the OIC program to more closely reflect real-world situations.
For example, the IRS has more flexibility with financial analysis for determining reasonable collection potential for distressed taxpayers.
Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.
Details on IRS Collection and Other Information
A series of eight short videos are available to familiarize taxpayers and practitioners with the IRS collection process. The series “Owe Taxes? Understanding IRS Collection Efforts”, is available on the IRS website, www.irs.gov.
The IRS website has a variety of other online resources available to help taxpayers meet their payment obligations:
- IR-2011-20: IRS Announces New Effort to Help Struggling Taxpayers Get a Fresh Start; Major Changes Made to Lien Process
- Offer in Compromise
- Tax Tip: Ten Tips for Taxpayers Who Owe Money to the IRS
- The What If’s of an Economic Downturn
- Video on How to Complete Form 656: Offer in Compromise
IRS YouTube Video: Fresh Start: English
IRS Podcast: Fresh Start: English
Many small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for the small business health care tax credit. This credit can enable small businesses and small tax-exempt organizations to offer health insurance coverage for the first time. It also helps those already offering health insurance coverage to maintain the coverage they already have. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ 25 or fewer workers with average income of $50,000 or less.
Here is what small employers need to know so they don’t miss out on the credit for tax year 2010:
- Hurricane Irene, Tropical Storm Lee and other recent disaster-related tax relief postponed certain tax filing and payment deadlines to Oct. 31, 2011. Qualifying businesses affected by these natural disasters still have time to file and claim the small employer health care credit on Form 8941 and claim it as part of the general business credit on Form 3800, which they would include with their tax return. For more information on the disaster relief visit IRS.gov.
- Sole proprietors who file Form 1040, Partners and S-corporation shareholders who report their income on Form 1040 and had requested an extension have until Oct. 17 to complete their returns. They would also use Form 8941 to calculate the small employer health care credit and claim it as a general business credit on Form 3800, reflected on line 53 of Form 1040.
- Tax-exempt organizations that file on a calendar year basis and requested an extension to file to Nov. 15 can use Form 8941 and then claim the credit on Form 990-T, Line 44f.
- Businesses who have already filed can still claim the credit. For small businesses that have already filed and later determine they are eligible for the credit, they can always file an amended 2010 tax return. Corporations use Form 1120X and individual sole proprietors use Form 1040X.
- Businesses that couldn’t use the credit in 2010 may be eligible to claim it in future years. Some businesses that already locked into health insurance plan structures and contributions for 2010 may not have had the opportunity to make any needed adjustments to qualify for the credit for 2010. So these businesses may be eligible to claim the credit on 2011 returns or in years beyond. Small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.
For tax years 2010 to 2013, the maximum credit for eligible small business employers is 35 percent of premiums paid and for eligible tax-exempt employers the maximum credit is 25 percent of premiums paid. Beginning in 2014, the maximum tax credit will go up to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations.
Additional information about eligibility requirements and calculating the credit can be found on the Small Business Health Care Tax Credit for Small Employers page of IRS.gov.
- Form 8941, Credit for Small Employer Health Insurance Premiums (PDF)
- Form 3800, General Business Credit (PDF)
- Small Business Health Care Tax Credit for Small Employers