IRS Moving Expense Deductions

Federal tax laws allow you to deduct your moving expenses if your relocation relates to starting a new job or a transfer to a new location for your present employer. To qualify for the deduction, your new work location must be a sufficient distance from your old home and you must begin working shortly after you arrive.

Distance test requirements

The costs you incur for moves within the same town do not qualify for the deduction. The distance between your new job and your former home must be at least 50 miles farther than your previous employer is from that home. For example, if your previous commute to work was five miles each way, then the distance from your new job location to your old home must be at least 55 miles. When evaluating whether you satisfy the distance test, the IRS requires you to use the shortest commutable routes between two locations.

Time test requirements

You must work full-time for a minimum of 39 weeks during the initial 12-month period that starts on the day you arrive in the new location. You can still satisfy this requirement when the 39 weeks are not consecutive and even when it's for multiple employers. The IRS does not specify the number of days or hours you must work each week to be a full-time employee; instead, it defers to your industry’s commonly-accepted standard.

Deductible moving expenses

The deduction covers the reasonable expenses you incur to transport your personal effects and household items to your new home. You can even include the cost of renting a storage unit for up to 30 days if you are unable to move into your new home immediately after leaving your former home.

You can also include the cost of traveling to the new location for yourself and other members of your household. If you drive to the new location in a personal vehicle, you can include the actual cost of oil, gasoline, parking fees and highway tolls. In lieu of using the actual cost of gasoline and oil, the IRS permits you to calculate those costs using the standard mileage rate. For long-distance moves, you can deduct the cost of airline and train tickets.

Claiming the moving expenses deduction

The moving expense deduction is one of the few tax deductions you can claim before knowing whether you satisfy the requirements. As a result of the time test’s 12-month period, most taxpayers cannot satisfy the time test until the following tax year. However, the IRS allows you to claim the deduction in the year you move.

To claim the deduction, you must report all relocation expenses on IRS Form 3903 and attach it to the personal tax return that covers the year of your move. In the event you do not satisfy all requirements at the conclusion of the 12-month period, you must reverse the deduction. You will either include the original deduction amount in “other income” on your next tax return or amend the original return to calculate your tax without the moving expense deduction.

Which Credit Card Rewards Does the IRS Care About?

Citigroup's Citibank recently sent recipients of a special frequent flier mile promotion an unwelcome surprise: a 1099 tax form indicating those bonus miles have been reported to the IRS as income.

Even if you weren't part of that promotion, it's reasonable to wonder whether the frequent flier miles or other credit card rewards you collect are going to cost you, too, come tax time.

The answer appears to be no. The two scenarios are different:

In the taxable promotion, Citibank was seeking new customers and those who opened new accounts received 25,000 miles as a reward.
In contrast, the regular miles and rewards that we accumulate over time are due to our using our debit or credit cards.

In other words, the former is more akin to a financial gift, while the latter is considered a rebate earned by the customer.

This issue is only recently rearing its ugly head because sign-up prizes haven't generally been big enough to trigger reporting. Recent banking reforms, though, have caused banks to see the revenue they were used to collecting from hefty fees for overdrafts, late payments, and debit-card swipes shrink. As a result, they've been shifting their focus and are now competing aggressively for new customers.

In the case of Citibank's rewards, it valued each mile as worth 2.5 cents, so a 25,000-mile reward was worth $625, and therefore the bank deemed it reportable as taxable income. Thus, Citibank was simply following the IRS' rules, which require the reporting of prizes or awards valued at $600 or more.

The concept of gifts being taxable isn't a new one. In an article at CreditCards.com, Connie Prater offered the famous example of Oprah Winfrey giving those in the audience at one of her show's tapings a free car. That was a thrilling surprise windfall for the lucky attendees, but it caused problems for some, too, as the value of the cars was considered taxable income. If you suddenly receive a $25,000 car, you might find that you have to cough up $6,000 in taxes. You'll still come out ahead, but you'll face a cash crisis if your bank account isn't flush.

Rewards the IRS Usually Ignores

While sizable gifts from banks can indeed be considered taxable income, the rewards that banks give you based on your credit or debit card usage are generally not taxable -- and generally don't even need to be reported to the IRS.

Citibank spokeswoman Emily Collins has explained, "Rewards and airline miles that are provided in connection with a purchase on a credit card are routinely not subject to individual income tax reporting."

Getting a reward for opening a new account can still be a non-event, tax-wise, if the reward isn't worth $600 or more. A Wells Fargo (WFC) spokeswoman noted that her company's recent giveaway for new accounts was a stuffed animal.

The Big Picture

It's important not only to understand what is and isn't taxable, but also to remember that the world of tax rules is a fluid one. Rules change over time. Indeed, already, Sen. Sherrod Brown (D-Ohio) has called on Citibank to stop treating the frequent flier miles as income. Whether the bank will stop -- or even whether it can, given IRS rules -- remains to be seen.

When it comes to IRS regulations, it's best to follow them -- they're not optional. One area in which Citibank does seem to have some discretion is in how it values its miles. If it valued each mile at $0.02 instead of $0.025, the value of 25,000 miles would have been $500, not $625, and wouldn't have crossed the $600 threshold.

Until further notice, taxpayers who collect rewards for credit- or debit-card use should follow the rules, resting easy about their purchase-related rewards and preparing to report any sizable gifts from banks.

By Selena Maranjian for Aol.

Average Tax Refund Slips to $2,913 in 2011

The IRS not only doled out fewer tax refunds last year, but it also cut smaller checks with the average refund slipping by nearly $100.

Taxpayers received tax refunds averaging $2,913 in 2011, down 3% from the average refund of $3,003 in the prior year, according to the latest filing statistics released by the IRS.

The agency delivered a total of 109.3 million refunds during the year, adding up to a total of $318.5 billion. That's down slightly from 2010, when 109.4 million refunds were given out, totaling $328.4 billion.

Direct deposit was the most popular way for taxpayers to receive refunds last year, with more than 79 million refunds deposited into accounts -- up 6% from 2010.

More than 75% of taxpayers filed returns using the agency's free online e-filing system, an increase of nearly 14% from the previous year. While the majority of e-filers hired tax professionals to submit their taxes, the number of taxpayers preparing their own taxes jumped by 14%.

For those who think you're owed a refund but haven't gotten any money back yet, it could still be out there. In late November, the IRS said it is holding onto tens of millions of dollars in tax refunds that it hasn't been able to deliver to consumers due to mailing address errors.

To find out what happened to your refund, check the status by using the "Where's My Refund?" tool on the IRS website.

By Blake Ellis from @CNNMoney

Key Tax Deductions Left Hanging

It may be a new year, but when Congress returns from its winter break it will be all old business that lawmakers failed to finish before Christmas.

The fight over a temporary extension of the payroll tax cut and long-term federal unemployment benefits sucked up all the oxygen on Capitol Hill. And it will suck up more between now and the end of February, when the two-month extension Congress managed to pass expires.

In the meantime, lawmakers left more than 50 expiring business and individual tax breaks hanging in the balance, along with an expanded mass transit break for workers.

Officially, of course, they expired on Dec. 31. But like Lazarus, they may be risen from the dead by Congress, which could choose to extend them and make the breaks retroactive to the start of this year. That way they'll be in effect before taxpayers have to fill out their federal returns for this tax year in early 2013.

The value of keeping the so-called tax extenders on the books is debatable. Tax experts argue that many should be ditched.

But the everlasting question mark punctuating these and other tax breaks is a source of frustration for anyone who takes tax and financial planning seriously.

"Taxpayers are very unhappy because they don't know what's going to happen; they can't plan," said David Mellem, who is certified to represent taxpayers before the IRS.

Expanded mass transit break: For three years, workers whose employers subsidized their commuting costs were entitled to receive the same amount of money whether they took mass transit or drove to work and paid for parking.

The parity in the benefits, which are tax-free to workers, meant mass transit commuters got more than they had in previous years.

But now Congress has let the mass transit expansion expire. As a result, those who take mass transit may only receive up to $125 a month tax-free, whereas those who drive to work can receive $240 a month.

State and local sales tax deductions: Taxpayers are allowed to deduct their state and local income tax on their federal return. But in recent years, lawmakers gave them a choice: They either could deduct their income tax or the state and local sales taxes they paid in a given year.

The choice benefits residents of the nine states that don't actually have an income tax.

As of now, those residents won't have that choice for this tax year.

Mortgage insurance deduction: In addition to deducting the interest they pay on their mortgage, taxpayers whose adjusted gross income doesn't exceed $110,000 have been allowed to treat the premiums they pay for mortgage insurance as deductible interest too.

But that may not be an option for tax year 2012.

School teacher tax deduction: Many K-12 teachers pony up their own money to buy supplies and equipment for their classrooms. Unless Congress acts, they will no longer be able to deduct up to $250 a year for those expenses.

Higher education tuition deduction: For tax year 2011, taxpayers are allowed to deduct qualified tuition and related expenses paid on behalf of anyone in their household to a college or university. The deduction is available regardless of whether one chooses to itemize or not.

The deduction is worth up to $4,000 for someone whose adjusted gross income doesn't exceed $65,000 if single ($130,000 if married filing jointly). Those making between $60,000 and $80,000 ($130,000 to $160,000 if married), however, may only claim up to $2,000.

Tax year 2012 may be a different story. But look on the bright side. While the tax break hasn't been renewed, it means one less complicated deduction for taxpayers to figure out.

Larger AMT exemption amounts: To protect more than 20 million middle class households from having to pay the Alternative Minimum Tax, Congress typically passes an AMT "patch" every year.

They have yet to do so for 2012, but because most Americans don't have to file their returns until early 2013, lawmakers could pass a patch at any point this year and have it apply in time for the 2013 filing season.

The AMT was intended primarily for high-income taxpayers. But in recent years, it has threatened to engulf the less affluent because the income thresholds determining who must pay the tax were never adjusted for inflation.

The patch increases the amount of income tax filers may exempt from consideration when calculating whether they need to pay the AMT.

Without the AMT patch, tax filers would only be able to exempt $33,750 in income if single or $45,000 if married filing a jointly, according to CCH, a tax information publisher. That is considerably less than the $48,450 that single filers and $74,450 joint filers may claim on their 2011 returns.

By Jeanne Sahadi from @CNNMoney

IRS Unveils New Version of Smartphone App; IRS2Go 2.0 Offers Videos, Tax Help

The Internal Revenue Service announced today the availability of IRS2Go 2.0, an expanded version of its smartphone application designed to provide taxpayers easier access to practical tools and information.

The new app, available on the Apple and Android platforms, adds a new YouTube feature, news feed and tax transcript service in addition to existing tools, such as checking on the status of a tax refund.

“The new smartphone app provides an easy way for people to get helpful information about their taxes,” said IRS Commissioner Doug Shulman. “IRS2Go reflects a wider commitment at the IRS to find innovative ways to serve taxpayers in a rapidly changing world.”

The IRS released the first version of IRS2Go in 2011, and had more than 350,000 downloads. The phone app offers taxpayers a number of safe and secure ways to access information and keep current on practical tax information. The 2.0 version of the phone app includes three new tools:

Watch Us.
People can view IRS YouTube videos on their smartphones. The videos provide short, informative features on a variety of tax topics. The channel ranks as the fourth most viewed channel among more than 125 federal government YouTube channels. IRS also has YouTube channels available in multilingual and American Sign Language.  
Get the Latest News.
With this tool, users can have the latest IRS news releases delivered to their phones as it becomes available.   
Get My Tax Record.
Taxpayers can now order their tax return transcript from the IRS2Go app. The transcript will be delivered via the U.S. Postal Service to their address of record.

The free IRS2Go app will continue giving taxpayers access to the tools offered last year:

Get Your Refund Status.
Taxpayers can check the status of their federal tax refund through the phone app with a few basic pieces of information. An updated refund status is available about three days after the IRS acknowledges receipt of an e-filed return, or four weeks after mailing a paper return.
Get Tax Updates.
Phone app users enter their e-mail address to automatically receive simple, straightforward tips and reminders to help with tax planning and preparation. Tax Tips are issued daily during the filing season and periodically throughout the rest of the year.
Follow the IRS.
Taxpayers can sign up to follow the IRS Twitter newsfeed, @IRSnews, which provides easy-to-use information, including updates on tax law changes and important IRS programs.

Apple users can update or download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app.

Treasury, IRS Issue Proposed Regulations for FATCA Implementation

The Treasury Department and the Internal Revenue Service today issued proposed regulations for the next major phase of implementing the Foreign Account Tax Compliance Act (FATCA).

Enacted by Congress in 2010, the law targets non-compliance by U.S. taxpayers using foreign accounts.

The regulations lay out a step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents.

“FATCA strengthens U.S. efforts to combat offshore noncompliance. In doing so, we understand it creates a significant undertaking for financial institutions." said IRS Commissioner Doug Shulman. "Today's proposed regulations reflect our commitment to take into account the implementation challenges of affected financial institutions while allowing for a smooth and timely roll-out of the law."

The proposed regulations implement FATCA’s obligations in stages to minimize burdens and costs consistent with achieving the statute’s compliance objectives. The rules and implementation schedule are also adjusted to allow time for resolving local law limitations to which some FFIs may be subject.

FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires FFIs to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

In order to avoid being withheld upon under FATCA, a participating FFI will have to enter into an agreement with the IRS to:

1. Identify U.S. accounts
2. Report certain information to the IRS regarding U.S. accounts
3. Verify its compliance with its obligations pursuant to the agreement, and

4. Ensure that a 30-percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.

Registration will take place through an online system which will become available by Jan. 1, 2013. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

Treasury and IRS will continue to work closely with businesses and foreign governments to implement FATCA effectively. Updates and further information on FATCA can be found by visiting the FATCA page or asking your CPA.

Identity Theft Crackdown Sweeps Across the Nation; More than 200 Actions Taken in Past Week in 23 St

The Internal Revenue Service and the Justice Department today announced the results of a massive national sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft.

Working with the Justice Department’s Tax Division and local U.S. Attorneys’ offices, the nationwide effort targeted 105 people in 23 states. The coast-to-coast effort took place over the last week and included indictments, arrests and the execution of search warrants involving the potential theft of thousands of identities and taxpayer refunds. In all, 939 criminal charges are included in the 69 indictments and informations related to identity theft.

In addition, IRS auditors and investigators conducted extensive compliance visits to money service businesses in nine locations across the country in the past week. The approximately 150 visits occurred to help ensure these check-cashing facilities aren’t facilitating refund fraud and identity theft.

“This unprecedented effort against identity theft sends a strong, unmistakable message to anyone considering participating in a refund fraud scheme this tax season,” said IRS Commissioner Doug Shulman. “We are aggressively pursuing cases across the nation with the Justice Department, and people will be going to jail. This is part of a much wider effort underway at the IRS to help protect taxpayers.”

“The Justice Department is working closely with the IRS to investigate, prosecute, and punish tax refund crimes committed through the theft of identities,” said Principal Deputy Assistant Attorney General John A. DiCicco of the Tax Division. “Now, more than ever, we must remain vigilant against the unauthorized use of identification information to defraud the U.S. government.”

The national effort is part of a comprehensive identity theft strategy the IRS has embarked on that is focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes.

The law-enforcement sweep started last week across the country, reflecting investigative efforts stretching back months and even years.

The nationwide effort by the Justice Department and the IRS led to actions taking place in 23 locations across the country with 105 individuals. The actions included 80 complaints/indictments and informations, 58 arrests, 19 search warrants, 10 guilty pleas and four sentencings. A map of the locations and additional details on the actions are available on IRS.gov, the IRS Civil and Criminal Actions page and the Department of Justice Tax Division page.

Beyond the criminal actions, the IRS enforcement personnel conducted a special sweep last week and on Monday to visit 150 money services businesses to help make sure these businesses are not knowingly or unknowingly facilitating identity theft or refund fraud. The visits occurred in nine high-risk places identified by the IRS covering areas in and surrounding Atlanta, Birmingham, Ala., Chicago, Los Angeles, Miami, New York, Phoenix, Tampa and Washington, D.C.

In addition, the IRS has more than 250 check-cashing operations under audit across the country and will be looking for indicators of identity theft as part of the exam effort.

The information from these audits and compliance visits will be used to assist continuing IRS investigations into refund fraud and identity theft.

The IRS also is taking a number of additional steps this tax season to prevent identity theft and detect refund fraud before it occurs. These efforts includes designing new identity theft screening filters that will improve the IRS’s ability to spot false returns before they are processed and before a refund is issued, as well as expanded efforts to place identity theft indicators on taxpayer accounts to track and manage identity theft incidents.

To help taxpayers, the IRS earlier this month created a new, special section on IRS.gov dedicated to identity theft matters, including YouTube videos, tips for taxpayers and a special guide to assistance. The information includes how to contact the IRS Identity Protection Specialized Unit and tips to protect against “phishing” schemes that can lead to identity theft.

Identity theft occurs when someone uses another’s personal information without their permission to commit fraud or other crimes using the victim’s name, Social Security number or other identifying information. When it comes to federal taxes, taxpayers may not be aware they have become victims of identity theft until they receive a letter from the IRS stating more than one tax return was filed with their information or that IRS records show wages from an employer the taxpayer has not worked for in the past.

If a taxpayer receives a notice from the IRS indicating identity theft, they should follow the instructions in that notice. A taxpayer who believes they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. The taxpayer should contact the IRS Identity Protection Specialized Unit at 800-908-4490. The taxpayer will be asked to complete the IRS Identity Theft Affidavit, Form 14039, and follow the instructions on the back of the form based on their situation.

Taxpayers looking for additional information can consult the Taxpayer Guide to Identity Theft or the IRS Identity Theft Protection page on the IRS website.

Fraudulent Tax Returns Surge 181%

The number of taxpayers trying to bamboozle the IRS and collect bigger refunds has shot up this filing season.

The IRS identified 335,341 tax returns claiming $1.9 billion in fraudulent refunds as of March 4, 2011, according to the findings of an audit conducted by the Treasury Inspector General for Tax Administration. That's a whopping 181% increase from the same period last year.

While the IRS has become more effective in its screening process, a weak economy has also driven more people to cut corners, said Tim Gagnon, assistant academic specialist of Accounting at Northeastern University.

"When the economy gets really bad, people get more touchy about how much they're paying in taxes and look at where they think they can push the envelope a little more," said Gagnon. "100 extra dollars really makes a difference to people now."

Many taxpayers tried to boost their refunds or reduce their tax liability by claiming deductions and credits they didn't qualify for, TIGTA found.

For example, the Earned Income Tax Credit, aimed at helping lower-income taxpayers, has been a large source of fraud, with people falsely lowering their income to qualify or claiming children they don't have. The IRS estimates that 23% to 28% of EITC credits are wrongfully paid to Americans every year, totaling $11 to $13 billion.

Child tax credits have also been abused, with more taxpayers unable to provide legitimate social security numbers for their children.

The adoption credit, which grants qualifying adoptive parents refunds of up to $13,170 for each child, also appears to be attracting fraud. TIGTA has identified 1,081 individuals who claimed the credit in excess of the limit -- amounting to $3.9 million in erroneous refunds.

Another problem: returns claiming the first-time homebuyer tax credit -- which grants new home owners credits of up to $8,000 -- for home purchases with ineligible purchase dates.

And taxpayers also claimed vehicle credits, like the qualified plug-in electric drive motor vehicle credit, for cars that didn't qualify.

IRS Crackdown

Another reason for the huge increase is ramped up enforcement efforts on the part of the IRS.

Prisoners were of particular interest this filing season. As of March 4, the IRS had selected 63,501 tax returns filed by prisoners to screen. That's up 88% from the same period last filing season, TIGTA found.

In a previous review of the IRS, TIGTA reported that most tax returns filed by prisoners were not being screened, making the group a prime target for enforcement, said Gagnon.

"You somewhat have to question what a person in prison has for income -- and plus, a big question is, what's their biggest risk when filing their taxes? Fraud? They're already in jail," he said.

Gagnon thinks the surge in fraudulent returns mean a surge in audits is also on the way. And following the trend of recent years, he expects most of these audits to be conducted by mail to save the IRS resources.

The IRS is also getting more efficient at reviewing tax returns and identifying errors or false information, thanks to the increase in electronic filing. The number of e-filed returns surged to a record high this year, topping 100 million for the first time in history -- a nearly 9% increase from last year, according to the IRS.

When taxpayers file their taxes electronically, it's much easier for the IRS to analyze them, said Gagnon.

Many messy returns

Not all of the so-called "fraudulent" returns are a result of taxpayers trying to scam the system, said Gagnon.

Many taxpayers were in such a pinch financially last year that they were less likely to hire a professional to prepare their taxes -- often resulting in more incorrect claims, outdated deductions and other common errors.

For example, if you were laid off from your job and became self-employed, you were subject to a whole new set of rules you may not know about, and more likely to make a mistake.

Plus, the tax code changed in December -- and the final touches were agreed upon so late in the year that many taxpayers had already begun preparing their returns and may not have been informed of the new guidelines.

TIGTA plans to publish the final results of its review later this year.

By Blake Ellis at CNNMoney

IRS e-file Launches; Most Taxpayers Can File Immediately

The Internal Revenue Service opened the 2012 electronic tax return filing season today with a reminder to taxpayers that e-file remains the best way to get fast refunds and ensure accurate tax returns.

IRS e-file has surpassed the milestone of 1 billion returns processed. The electronic transmission system revolutionized the way the IRS processes tax returns and made speedy refunds possible. More than 112 million income tax returns were e-filed last year, or 77 percent of all individual returns filed.

"E-file is the best option for taxpayers. E-file enables taxpayers to file more accurate returns and receive their refunds quickly and safely," said IRS Commissioner Doug Shulman.

In general, for people concerned about security, e-file has proven itself year in and year out as a safe and secure method of filing a tax return. E-file has a proven track record. Software vendors and paid tax return preparers use the latest encryption technology. Plus, within 48 hours, an electronic acknowledgement is issued that the return has been received by the IRS and either accepted or rejected.

With most people receiving a refund, the fastest way to get a refund is by e-filing and using direct deposit. Taxpayers can get their money automatically in as few as 10 days. Last year, more than 79 million refunds were electronically deposited into taxpayers’ accounts, saving them a trip to the bank.

For people who owe taxes, e-file offers payment alternatives such as filing now and scheduling payment on the April tax deadline. Taxpayers who still want to pay by check can do so by e-filing and then mailing a payment voucher.

Taxpayers can e-file their tax returns through a tax return preparer. The IRS does not charge for e-file. Many tax return preparers and software products also offer free e-filing with their services.

Starting this filing season, any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically. Taxpayers are encouraged to use tax return preparers who offer IRS e-file.

Taxpayers should also only use paid preparers who sign the returns they prepare and enter their Preparer Tax Identification Numbers (PTINs). Preparers are required to sign the returns they prepare and include their PTINs. Although paid preparers sign returns, taxpayers are legally responsible for the accuracy of every item on their return. Preparers are also required to give taxpayers a copy of their returns.

When using e-file, you also use an e-signature and an electronic filing PIN. When using a paid preparer, you can still use the self-select PIN method or the practitioner PIN method. The Electronic Filing PIN is a temporary PIN used by the IRS to verify your identity when you e-file.

Fed to Keep Rates Low Until 2014

The economy is improving, the Federal Reserve said Wednesday, but not enough to warrant higher interest rates for at least two-and-a-half more years.

The central bank indicated that it expects to keep the federal funds rate near historic lows until late 2014 -- an extension from the Fed's original pledge to keep rates low through mid 2013.

"[T]he economy has been expanding moderately, notwithstanding some slowing in global growth," the Fed said in a statement Wednesday. Meanwhile, the program known as Operation Twist remains in place.

More details will come at 2 p.m. ET, when the Fed will release forecasts for the federal funds rate for the first time ever.

The Fed's main tool for stimulating the economy, the federal funds rate is the interest rate banks charge one another for overnight loans. Keeping it at historic lows as the Fed has done since 2008, is meant to stimulate spending by lowering interest rates on everything from mortgages to car and student loans.

Immediately, the Fed's announcement sent U.S. bond yields falling. The 10-year Treasury yield fell to 1.94%. That's down from a 2.06% yield just a day earlier.

As markets reacted strongly to the news, economists cautioned that the Fed's 2014 forecast is not a concrete promise. Should economic growth pick up more quickly, the Fed could raise interest rates sooner.

"It's not a vow or a commitment," said Michael Gregory, senior economist with BMO Capital Markets. "If the outlook changes on the unemployment or inflation, the Fed retains the right to change its mind."

The statement follows a two-day policymaking meeting, at which the central bank shuffled its voting members as it does at the beginning of every year.

The rotation brings four new regional Fed presidents into voting roles: Jeffrey Lacker of Richmond, Sandra Pianalto of Cleveland, Dennis Lockhart of Atlanta and John Williams of San Francisco.

All but Lacker are considered either moderates or inflation doves, meaning they're more likely to favor stimulative policies that promote economic growth, even at the risk of higher inflation.

Lacker was the sole Fed member to dissent against the policy decision Wednesday. He would have preferred the central bank not to release an actual timeframe for "exceptionally low" rates.

Besides the roster change, the Fed's first meeting of the year is also noteworthy because it marks the first time the central bank will release forecasts, estimating where the federal funds rate will stand over the next few years.

While the Fed already alluded to those forecasts in its statement, the projections from each of its members are scheduled to be released later Wednesday, along with projections on economic growth, inflation and unemployment.

By Annalyn Censky from @CNNMoney

Four Tax Tips Regarding Tip Income

If your pay from work involves compensation through tips, then the IRS would like you to be aware of a few facts about tip income. Here are four key points to keep in mind:

1. Tips are taxable Tips are subject to federal income, Social Security and Medicare taxes.  The value of non-cash tips, such as tickets, passes or other items of value, is also considered income and subject to tax.

2. Include tips on your tax return You must include in gross income all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip-splitting arrangement with fellow employees.

3. Report tips to your employer If you receive $20 or more in tips in any one month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes.

4. Keep a running daily log of your tip income. You can use IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tip income.

IRS Audited 1 in 8 Millionaires

The IRS audited one out of every 8 millionaires last year, the third year in a row the agency has ramped up its enforcement of the nation's top earners.

About 12.5% of all taxpayers earnings one million dollars or more were dealt audits during fiscal 2011-- the highest enforcement rate since at least 2004, according to IRS enforcement statistics released Thursday. That's up from a rate of 8.4% in 2010 and 6.4% in 2009.

The IRS has been cracking down on offshore tax evaders over the past few years, many of which are high-income taxpayers, said Michelle Eldridge, spokeswoman for the IRS. So this ongoing push can be attributed to the big jump in audits of millionaires this year, she said.

This year, the agency offered taxpayers a reduction in penalties and no jail time for a limited window of time if they fessed up to having offshore accounts.

Taxpayers making more than $200,000 a year were also at a higher risk of audit last year. One in 25 of these high income earners were audited in 2011, compared to about one in 32 in 2010, according to the IRS.

But the odds of getting audited were significantly slimmer for people reporting less than $200,000 in income, with only one in 98 of these taxpayers going through the audit process last year.

A total of 1.6 million 2010 returns were audited during 2011, with 75% of those conducted by mail instead of in-person, the IRS said. Even though there was a significant increase in the number of millionaires audited, the IRS's enforcement revenue still slipped 4% to $55 billion last year.

Original article by Blake Ellis for @CNNMoney.

What You Need to Know for Your 2011 Tax Filing and What’s New for 2012

Tax season is here again! While the filing deadline might be a couple of months away, this month you will receive all required third-party reporting documents: W2s, 1099s for interest and dividends, 1099s for nonemployee compensation if you are an independent contractor, 1099-Bs from your broker reporting proceeds from the sale of stocks and bonds, 1098s from your mortgage holder, K-1s from partnerships, S Corps, estates, and trusts. Hopefully, you’ve set up a file to store all these documents to make data gathering for tax preparation a snap. If not, now’s the time to create one.

Note that the due date for filing this year is April 17. If a tax due date falls on a weekend or a holiday, the next business day becomes the due date. This year April 15 is a Sunday and Monday, April 16 is a federal holiday so the due date falls on Tuesday, April 17. If you are unable to file by the deadline, you may obtain an extension to Oct. 15. Bear in mind that the extension is for filing, not paying. All taxes must be paid by April 17 otherwise you may suffer penalties and interest.

If you pay estimated tax payments throughout the year, the due date for your next quarterly installment for prepayment of 2011 income taxes is Tuesday, Jan. 17. Estimated tax payments for 2012 will be due on April 17, June 15, Sept. 17 and Jan. 15, 2013.

Beginning in 2011, brokerage firms are required to report to the IRS not only proceeds from sales of stocks and mutual funds, but also the cost basis of the investments that are sold. The IRS has designed a new Form 8949 for reporting capital gains and losses. A summary of the information listed on this form is carried over Schedule D. A couple of new columns are added to Form 8949 reporting – one for adjustments to basis (in case your broker has an incorrect figure) and one for coding the transaction to identify the type of sale.

Business mileage rates for 2011 were changed mid-year, so when calculating your mileage for 2011 use the rate of 51 cents per mile for miles driven up to June 30, 2011 and 55 ½ cents per mile from July 1 to Dec. 31.

Mileage rates for 2012 are as follows: 55 ½ cents per mile for business, 23 cents per mile for moving and medical, and 14 cents per mile for charitable purposes.

The temporary payroll tax cut has been extended to Feb. 29; employees will enjoy a continued savings of 2% of wages withheld for Social Security – from 6.2% to 4.2%. The Social Security wage base for 2012 is $110,100 up from $106,800 in 2011. Once your wages exceed this amount, Social Security will not be withheld but Medicare will continue to be withheld.

The self-employment health insurance deduction no longer offsets the self-employment tax. In 2010 only, self-employed workers were able to reduce the amount subject to self-employment tax on Schedule SE by the amounts paid for health insurance premiums. You can still take the deduction on Form 1040 as an adjustment to income.

Foreign financial assets are reported on a new Form 8938. The foreign asset disclosure form is separate and different from the foreign bank account report. Taxpayers with foreign assets may need to file both documents.

The first-time home buyer’s credit is now only available to members of the military or Foreign Service. If you are repaying the first-time home buyer’s credit, you may not need to complete and attach Form 5405.

Also gone for 2011 is the Making Work Pay Credit. For the past few years we enjoyed $400 per year single and $800 married filing joint credit against our tax liabilities.

Written by Bonnie Liee for Fox Business.

When Can I Expect My Refund?

The Internal Revenue Service reminds taxpayers to keep in mind that many variables can affect the speed of a tax refund. Using e-file with direct deposit remains the fastest option for taxpayers.

Following technology improvements, the IRS will issue refunds to more taxpayers in as few as 10 days this year for those who e-file and select direct deposit. Overall, the IRS issues the vast majority (more than 9 out of 10) of all refunds — whether filed electronically or on paper — in 21 days or less.

Although refund speed will generally increase overall, the IRS emphasizes these are “best-case scenarios,” where tax returns are filed accurately and no corrections or review are required.

In addition, the IRS also cautions taxpayers it is increasing scrutiny of tax returns for signs of fraud. This means some tax refunds will face additional screening and review before being released, which will add time before the refund is delivered.

There are some simple ways for people to help ensure they receive their refund quickly.

E-file remains the best way to ensure an error-free return.

Taxpayers can help ensure their refund arrives as expected by submitting an error free return. Use the correct Social Security number or taxpayer identification number, the correct address, and the correct bank and routing number if electing direct deposit.

You don’t need to wait on the phone to check on the status of your refund. The fastest and best way to get information on your refund is through the “Where's My Refund?” tool on IRS.gov and the IRS2Go phone app. Information about refund status is available about three days after the IRS acknowledges receipt of your e-filed return, or four weeks after mailing a paper return.

The free IRS2Go application is available at the Apple App Store and the Android Marketplace.

FASB Awaits Decision on Private Company Accounting Changes

Financial Accounting Standards Board chair Leslie Seidman has been reviewing the suggestions that have been coming in about the proposed Private Company Standards Improvement Council while awaiting a decision on how much authority her board will have over the new council.

FASB and its parent organization, the Financial Accounting Foundation, are holding a series of roundtable meetings with private company representatives around the country to talk about the FAF’s proposal for the creation of the new council (see FAF Proposes New Council for Private Company Accounting Standards).

“The FAF has scheduled four roundtables in different cities around the country to provide an opportunity for the FAF board of trustees to have a dialogue with interested individuals to discuss the comments that they’ve made in response to the FAF proposal to put in place a new council to focus on private company issues,” Seidman said in an interview with Accounting Today staff on Friday. “The FAF has received over 6,500 letters at this point in time expressing quite a wide range of views. Many of them include very specific suggestions. Whether you’re in support of the proposal or not in support of the proposal, I think the FAF is very interested in continuing the dialogue with stakeholders so they can make an informed decision.”

The FAF is expected to issue a decision on the structure of the new council after the last roundtable meeting occurs on March 1, probably in the second quarter of the year. The comment period ends on Saturday, Jan. 14. FASB has been paying attention to the comments the FAF has received.

“Each of us has been reading the letters as they come in, but we actually have assigned staff people to do an analysis of the letters for us,” said Seidman. “One thing that I have learned reading the letters is that some people are not aware of some of the things that we are already doing, so at a minimum we have an opportunity to communicate more broadly about those efforts. But the other things that we have been working on in the meantime, irrespective of any structural change that may take place, have to do with the development of a framework for deciding when there are unique private company issues that would warrant a different accounting or disclosure approach, so we’ve been working with a resource group to develop modules on particular topics such as disclosure, effective date, transition, etc. Our goal is to put together a draft framework that we would expose for public comment, irrespective of any decision on this other front, but then probably pause until there is a decision made on that front because it’s so important to have the buy-in of that group so that we can move forward with a common understanding.”

Seidman noted that FASB is also working on what is the appropriate definition of a private company. She said there were six different definitions for private companies in the FASB Accounting Standards Codification because every time the board approached the issue it had a different objective in mind.

“We’re planning to come up with a more coherent approach to that because it will be extremely important in determining who would qualify for any differences that are ultimately agreed upon,” said Seidman.

In looking through the comments and evaluating the feedback from the roundtables so far, FASB has also been looking for any actions it can take in the meantime to make some simplifications for private companies before a decision is made on the structure of the proposed council.

Seidman noted that FASB has recently added a project on fair value disclosures to determine whether there is a way for the board to streamline such disclosures for private companies. FASB also issued a standard last year on goodwill impairment in response to feedback from private companies; the new standard also applies to public companies.

Seidman noted that the proposed structure for the PCSIC would have several advantages over the Private Company Financial Reporting Committee, which it will replace. She praised the members of the PCFRC for “doing a great job on a volunteer basis, for bringing us excellent and timely feedback on our proposals. They’ve responded to almost every single proposal that we’ve issued since they were formed and their feedback has been greatly valuable.”

But the proposed council would have a number of advantages, including staff resources from FASB and a greater level of interaction with the board.

“We would anticipate full FASB staff support for the PCSIC,” she said. “That means that our staff would be preparing the analysis, the memos, everything that group needs to make decisions. That is not the case with PCFRC. Each of them relies on their own support at their own firms to do whatever analysis is necessary for them to then come together and advise us on a particular matter. So, in other words, they would have much more support in the process and the exact same materials that the board members would use to make a decision.”

FASB board members would also participate in the PCSIC meetings in order to have an ongoing dialogue as the issues are being debated, Seidman added.

“In the early days of the PCFRC, I never met a PCFRC member until, I think, the organization had been running for two or three years,” she said. “It was almost by design set up to be an independent organization, whereas this is very much intended to be an integrated organization so that there is a free flow of ideas and the board members can hear firsthand what the PCSIC members are saying and vice versa, which I think puts you in the best possible position to come to a consistent answer when it’s appropriate to have a consistent answer.”

She noted that the PCFRC does not vote, but only provides recommendations to the board. She said the PCSIC would have a significantly higher level of authority. Instead of being overseen by FASB, as the PCFRC is, the PCSIC would be overseen by the FAF. The PCSIC would also be able to vote on recommending differences in standards for private companies. Also unlike the PCFRC, the PCSIC would operate with a framework for when it is appropriate to establish differences for private companies.

“To me, that is essential to the path forward regardless of whether there is a structural change,” said Seidman. “But in the event that a PCSIC is set up, or a separate board is set up, I think it’s essential to have a framework that’s agreed upon as to when differences are warranted. Otherwise, I’m concerned that history is going to repeat itself.”

The American Institute of CPAs has been pushing for a separate board for private company standards overseen by the FAF, but independent of FASB, and it has been encouraging CPAs to write to the FAF with comments supporting a more independent board. Under the FAF proposal, the PCSIC would be chaired by a FASB board member, and FASB would be able to accept or reject any of the PCSIC’s recommendations. Many of the comment letters that have come to the FAF about the new council have objected to FASB’s ability to reject the PCSIC’s recommendations.

“It is a common point being commented upon in the letters coming in to the FAF,” Seidman acknowledged. “As it applies to all of the elements of that proposal, people are making suggestions, they are raising issues with various aspects of it and making suggestions for how to improve it, and I know that’s one of them.”

Seidman also discussed the status of FASB’s convergence efforts with the International Accounting Standards Board, and acknowledged that a number of projects had been delayed. She noted that the leasing standards, for example, would not be finalized until 2013. Financial instrument impairment probably would not be ready until early next year as well, even though FASB and the IASB have recently agreed upon at least the “skeleton” of an “expected losses” model as opposed to “incurred losses.” But they still need another meeting to flesh out that model. She believes that the projects for investment properties, investment companies, and consolidations should be resolved by the end of 2012. Revenue recognition could feasibly be finalized in 2012. The two boards are still far apart on the insurance contract project, and Seidman said a final standard would probably not be ready until 2013 at the earliest.

She hopes to avoid the arrangement that the two boards made with the recent offsetting standards in which financial statement preparers were advised to add disclosures to help investors bridge the gap between U.S. GAAP and International Financial Reporting Standards (see FASB, IASB Make Progress on Netting, Leasing and Impairment Standards).

“My priority at this point in time is to try and reach the same conclusions with the IASB,” she said. “We are not finished on the priority projects at this point in time. Revenue recognition we are converged, leasing we are converged, impairment we are converged. And it’s my intention to do everything I can to end up converged on insurance. I think it’s premature to talk about a disclosure solution for anything that we are actively working on.”

Top Ten Small Business Trends for 2012

The overall economic outlook is for continued moderate growth with U.S. GDP increasing 2.5%-3.0% with the expectation of hiring and the job market to improve, but unemployment will remain high and finish the year around 8%.

Social Trends

1.  Being Human:  A trend that has rippled through our research the past couple of years - and especially in 2011 - is the growing dissatisfaction with our de-humanized world.  Corporate employees tell us they are tired of being cogs in the enterprise machine.  Independent workers tell us they highly value the work/life flexibility and control independence provides. Consumers tell us they are looking for authenticity and honesty from the companies they buy from.  People in general tell us they are focusing more (or would like to focus more) on human relationships with their families, friends, business associates and communities.

Because of their size, scale and customer intimacy, small businesses are able to offer employees, business partners and customers stronger human-based relationships than large corporations.  2012 will see more small businesses recognize and take advantage of this key competitive advantage.

2.  One is No Longer the Loneliest Number:  The Internet, online distributed work tools, social media and the growth of coworking are eliminating the loneliness and lack of social and business contact traditionally associated with working independently.  Telecommuters, home-based business people, road warriors and independent workers are increasingly using these tools and resources to “work alone together”.  This growing ability to network, collaborate and socialize is making independent work more attractive, and 2012 will see the trend towards independent work continue to grow.

3.  Senior Independents:   Also driving the growth of independent workers is the increasing number of mature workers (those aged 55+) becoming independent (freelancers, consultants, temps, etc.).  Most of these older workers will choose independence because of the stimulation, freedom and flexibility it provides.  Others will become independent because they have no other job options, and/or financial pressure to continue working beyond traditional retirement age.

4.  Loyalty Meets Daily Deals:  There’s a lot of debate about the merits of daily deals.  We think 2012 will see daily deals morph beyond shotgun-style attempts to bring in new business to more targeted methods and systems designed to attract, retain and reward loyal customers.  Part of this is simply the maturation of daily deal business processes and technology.  But a bigger part is the growing recognition by both deal companies and their small business customers that repeat business, not new business, is the key objective.

Technology Trends

5.  Smartphones, Tablets and the Cloud Oh My!:  Smartphones, the Cloud and mobile computing have been on our top 10 lists in one form or another for years.  2012 is no exception and we expect mobile computing devices (smartphones and tablets) to substantially outsell traditional computers.  These cloud-supported devices are changing the way business is done and creating vast, new demand for apps, online video and audio, games, ebooks, magazines, newspapers, social networking – the list goes on and on.   2012 will see a growing number of small businesses embracing and leveraging these technologies.

6.  The Empire Strikes Back with Big Data:  The rise of the Internet and ever cheaper information technology enabled even the smallest of businesses to look, act and compete like a large company.  Big Data – the collection, manipulation and analysis of large datasets – allows large companies to look, act and compete like a small business by using data and analytics to provide personalized products and services.  It also increases their ability to aggressively compete on price.  Amazon’s controversial smartphone-based Price Check app is just the beginning of larger corporations using data, analytics and mobile computing to attack small business markets.

7.  Big Data Gets Small:  2012 will also see growing small business use of powerful yet inexpensive cloud-based data and analytical tools.  These tools will enable small businesses to organize, mine and analyze their data to improve their results.  In particular, the small business use of software and systems that combines and analyzes data from websites, customer purchases, marketing campaigns and social media activity will grow and greatly improve small business efficiency.

Economic Trends

8.  The Rental Economy Expands:  We’ve long covered the growing use of variable cost business models.  Also called Collaborative Consumption, the concept behind the rental economy is to increase the efficiency of goods by providing them on a variable cost basis (sharing their use).

Obviously this is not a new trend.  But the Rental Economy is rapidly expanding because the Internet, the Cloud and advanced analytics are enabling cost effective renting/sharing of a growing array of goods and services historically available primarily through ownership.

9.  Location, Location, Location:  A range of trends that have been building for a long time are converging to make location a key small business issue in 2012.  These include the growing power of the buy local movement, the increasing use of location in social media, a continued focus on sustainability and local food, and the growing use of cell phone and cloud enabled location-based services.  We used to think the Internet made location less important.  It also makes location more important.

10.  It’s the Best of Times and the Worst of Times for Startups:    The maturation of the Internet and other technologies (genomics, clean tech, robotics, Big Data, etc.) is creating vast new opportunities. It’s also cheaper than ever to start and grow a company, venture funding is available, valuations are high, large companies are in acquisition mode and the IPO market is opening up.  In many ways, it’s never been as easy or rewarding to be a startup than it will be in 2012.

But 2012 will also be a year of reckoning for many startups.  The last couple of years have produced almost a frenzy of new tech companies.  Many of these firms will need additional funding in 2012, and those not able to show strong customer traction will not be able to find it.

This information is provided by Small Business Labs at smallbizlabs.com.

IRS Kicks Off 2012 Tax Season with Deadline Extended to April 17

The Internal Revenue Service today opened the 2012 tax filing season by announcing that taxpayers have until April 17 to file their tax returns. The IRS encourages taxpayers to e-file as it is the best way to ensure accurate tax returns and get faster refunds.

The IRS also announced a number of improvements to help make this tax season easy for taxpayers. This includes new navigation features and helpful information on IRS.gov and a new pilot to allow taxpayers to use interactive video to get help with tax issues.

“At the IRS, we’re working hard to make the process of filing your taxes as quick and easy as possible,” said IRS Commissioner Doug Shulman. “Providing quality service is one of our top priorities. It not only reduces the burden on taxpayers, but also helps in filing an accurate return right from the start.”

Taxpayers will have until Tuesday, April 17, to file their 2011 tax returns and pay any tax due because April 15 falls on a Sunday, and Emancipation Day, a holiday observed in the District of Columbia, falls this year on Monday, April 16. According to federal law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have two extra days to file this year. Taxpayers requesting an extension will have until Oct. 15 to file their 2012 tax returns.

The IRS expects to receive more than 144 million individual tax returns this year, with most of those being filed by the April 17 deadline.

The IRS will begin accepting e-file and Free File returns on Jan. 17, 2012. Additional details about e-file and Free File will be announced later this month. IRS Free File provides options for free brand-name tax software or online fillable forms plus free electronic filing. Everyone can use Free File to prepare a federal tax return. Taxpayers who make $57,000 or less can choose from approximately 20 commercial software providers. There’s no income limit for Free File Fillable Forms, the electronic version of IRS paper forms, which also includes free e-filing.

The IRS also reminds paid tax return preparers they must have and include a Preparer Tax Identification Number (PTIN) on all returns they prepare. All PTINs must be renewed for 2011. Tax return preparers can obtain or renew PTINs online.

Assistance Options

The IRS continues to focus on taxpayer service. The best way for taxpayers to get answers to their questions is by visiting the IRS website at IRS.gov. The IRS has updated the front page of the IRS website to make it easier for taxpayers to get key forms, information and file tax returns. The front page also has links to taxpayer-friendly videos on the IRS YouTube channel. More improvements are planned for IRS.gov in the months ahead.  

Last year, the IRS unveiled IRS2Go, its first smartphone application that lets taxpayers check on the status of their tax refund and obtain helpful tax information. The IRS reminds Apple users that they can download the free IRS2Go application by visiting the Apple App Store and Android users can visit the Android Marketplace to download the free IRS2Go app.

Individuals making $50,000 or less can use the Volunteer Income Tax Assistance program for free tax preparation and, in many cases, free electronic filing. Individuals age 60 and older can take advantage of free tax counseling and basic income tax preparation through Tax Counseling for the Elderly. Information on these programs can be found at IRS.gov.

For tax law questions or account inquiries, taxpayers can also call our toll-free number (7 a.m. to 7 p.m. local time) or visit a taxpayer assistance center, the locations of which are listed on IRS.gov.

Virtual Service

The IRS has begun a new pilot program where taxpayers can get assistance through two-way video conferencing.  The IRS is conducting a limited roll out of this new video conferencing technology at 10 IRS offices and two other sites, and may expand to further sites in the future. A list of locations is available on IRS.gov.

Check for a Refund

Once taxpayers file their federal return, they can track the status of their refunds by using the “Where's My Refund?” tool, which taxpayers can get to using the IRS2Go phone app or from the front page of www.IRS.gov.  By providing their Taxpayer Identification Numbers, filing status, and the exact whole dollar amount of their anticipated refund taxpayers can generally get information about their refund 72 hours after the IRS acknowledges receipt of their e-filed returns, or three to four weeks after mailing a paper return.

More Innocent Spouses Qualify for Relief Under New IRS Guidelines

The Internal Revenue Service today released new proposed guidelines designed to provide relief to more innocent spouses requesting equitable relief from income tax liability.

A Notice proposing a new revenue procedure, posted today on IRS.gov, revises the threshold requirements for requesting equitable relief and revises the factors used by the IRS in evaluating these requests. The factors have been revised to ensure that requests for innocent spouse relief are granted under section 6015(f) when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process. The new guidelines are available immediately and will remain available until the finalized revenue procedure is published. The IRS will immediately begin using these new guidelines when evaluating equitable relief requests.

"The IRS is significantly changing the way we determine innocent spouse relief," said IRS Commissioner Doug Shulman. "These improvements should dramatically enhance our process to make it fairer for victimized taxpayers facing difficult situations.”

This is the second major change made to the innocent spouse program. In July, the IRS extended help to more innocent spouses by eliminating the two-year time limit that previously applied to requests seeking equitable relief.

Taxpayer Advocacy Panel Members Selected

The Internal Revenue Service (IRS) today announced the selection of 26 new members to serve on the nationwide Taxpayer Advocacy Panel (TAP). The TAP is a federal advisory committee charged with providing direct taxpayer feedback to the IRS.

The new TAP members will join 56 returning members to round out the panel of 82 volunteers for 2012. The new members were selected from more than 400 interested individuals from across the country who applied during an open recruitment period last spring.

“TAP members play an important role for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “The panelists provide the IRS with insights that help make the tax administration process better for all taxpayers.”
 
The TAP listens to taxpayers, identifies issues and makes suggestions for improving IRS service and customer satisfaction. Oversight and program support for the TAP are provided by the Taxpayer Advocate Service, an independent organization within the IRS that helps resolve taxpayer problems and make recommendations to avoid future problems.

“It is extremely important that the IRS consider the needs and preferences of America’s taxpayers,” said Nina E. Olson, National Taxpayer Advocate. “The vital work of these citizen volunteers helps the IRS provide all taxpayers with the top quality service they deserve."

TAP members work with IRS executives on priority topics, primarily those involving the Wage & Investment and Small Business/Self-Employed operating divisions. Members also serve as a conduit for bringing grassroots concerns raised by the taxpaying public to the attention of the IRS.

TAP members are U.S. citizens who volunteer to serve a three-year appointment and are expected to devote 300 to 500 hours per year to panel activities. TAP members are demographically and geographically diverse, providing balanced representation from all 50 states, the District of Columbia and Puerto Rico.

Taxpayers can contact the TAP representative for their geographic area by calling 888-912-1227 (a toll-free call) or via the Internet at www.improveirs.org. Taxpayers can also send written correspondence to the TAP at the following address:

Taxpayer Advocacy Panel (TAP)
TA: TAP, Room 1314
1111 Constitution Avenue, NW
Washington, D.C.  20224

Individuals interested in volunteering to serve on the TAP for 2013 may submit an application via the website www.improveirs.org during the next open recruiting period, which will begin in March 2012.

Three Stealth Tax Traps

Congressional gridlock over whether to cut or raise income taxes is obscuring a different threat to six-figure earners: a host of stealth taxes implemented in the name of deficit reduction. Many of the provisions, as with the dreaded alternative minimum tax, have never been adjusted for inflation. As a result, they have morphed into tax traps for upper-middle-income earners. Here are three of the most glaring examples.

Two of the new stealth taxes were created by last year's landmark health care reform bill. First, the Medicare payroll tax is going up. The tax is now 2.9% on all wages; employers and employees each pay 1.45%. Starting in 2013, individuals making more than $200,000 (and couples making more than $250,000) will have to kick in an additional 0.9% on wages above that amount.

A second, much heftier increase also takes effect in 2013, in the form of an unprecedented new 3.8% Medicare tax on investment income. It will strike filers whose "modified adjusted gross income" -- roughly speaking, wages plus investment income -- tops $200,000 for individuals or $250,000 for couples. (The tax will apply to whichever is less: investment income or the amount by which modified adjusted gross income exceeds the income threshold.) Investment income will include taxable capital gains, dividends, interest income, annuities, royalties, and rents. The thresholds for both of the new Medicare taxes will not be indexed for inflation. So they'll snag an increasing number of taxpayers over time.

Finally there's the taxation of Social Security benefits. In 1984, when the Social Security system faced a funding crisis, Congress enacted a law to make the wealthiest recipients pay income taxes on their benefits. Specifically, up to 50% of Social Security benefits became taxable when half of these benefits, plus a retiree's other income -- including retirement plan payouts and investment income -- exceeded $25,000 a year ($32,000 for couples). Back then, only about 10% of retirees had incomes that topped that level. In 1994 a second layer of tax was put in place: 85% of your Social Security benefits became taxable if half of your Social Security benefit plus your "other" income topped $34,000, or $44,000 as a couple.

Once again, none of those crucial thresholds were indexed to inflation; today the Social Security tax still kicks in at $25,000. As a result, about a third of retirees are now paying federal income tax on their Social Security benefits. A decade from now, an estimated 45% will owe the tax.

Don't expect relief from the government on any of those stealth taxes. Your best bet is to generate as much income as possible from sources that don't trigger them. One way to accomplish that is to put your retirement savings into a Roth IRA or Roth 401(k), where contributions are made with after-tax dollars, and all future investment gains and withdrawals are tax-free. At the end of the day, you may never be able to shield yourself completely from stealth taxes. But you can at least minimize the bite.

Virginia Proposes Tax Credits For Space 'Burials'

A bill has been introduced in Virginia’s state legislature to provide for an individual income tax deduction for those taxpayers who agree to be cremated and then have their remains sent into space.

A Republican state lawmaker, Terry Kilgore, has filed legislation that provides that, for tax years beginning on or after January 1, 2013, but before January 1, 2021, a deduction would be allowed on the amount of a prepaid contract entered into with the Virginia Commercial Space Flight Authority to place the taxpayer's cremated remains in earth or lunar orbit.

The total amount deducted by any individual would be limited to a total of USD8,000 per person. The amount deducted on any individual income tax return in any taxable year would be limited to USD2,500, but, if the purchase price of a prepaid contract exceeds USD2,500, any amount in excess of USD2,500 may be carried forward and subtracted in future taxable years, until the lesser of the purchase price or USD8,000 per person has been fully deducted.

However, any deduction taken would be subject to recapture in the taxable year in which either of the taxpayer terminates the prepaid contract or the contract is amended to provide for the launch of the taxpayer’s human cremated remains from a spaceport facility other than one operated by the Virginia Commercial Space Flight Authority.

It is suggested that the tax break is being offered as part of a package of measures aimed at boosting the profile of the Virginia spaceport, in competition with those in other states. There would also be benefits, it is felt, to other businesses, and therefore additional jobs created, in the state, from the spending of the family and friends of the deceased arriving to witness the take-off.

Payroll Tax Cut Temporarily Extended into 2012

Nearly 160 million workers will benefit from the extension of the reduced payroll tax rate that has been in effect for 2011. The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.

Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.

Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).   

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.

The IRS will issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision. For most employers, the quarterly employment tax return for the quarter ending March 31, 2012, is due April 30, 2012.

Your Social Security Check Is NOT in the Mail!

Do you still receive their Social Security checks in the mail? Mail carriers won't be dropping them in your mailbox in the near future. The government has announced it will no longer be issuing paper checks, so recipients will have to access their funds electronically. You'll have until March 1, 2013, to make the switch.
 
This change already affects older baby boomers who recently retired. As of May 1, 2011, new retirees are required to choose one of two electronic payment methods. Approximately 80 percent of Social Security recipients currently receive their payments electronically.
 
A retiree making the switch can have Social Security payments deposited directly into a bank or credit union or loaded on a prepaid debit card. To use direct deposit, the routing transit number and account number for the bank or credit union must be provided. You can sign up at GoDirect.org. Alternatively, you can also call the U.S. Treasury Electronic Payment Solution Center at (800) 333-1795 or ask about the direct deposit feature at a local banking institution.

Social Security recipients who don't choose an electronic payment option by March 1, 2013, will receive their payments via a Direct Express Debit MasterCard account. More than 1.5 million individuals have signed up for these prepaid debit cards since they first became available in 2008.
 
As with a bank account, fees may be charged for certain debit card transactions. For example, individuals may make purchases at retail locations, receive cash back with a purchase, and take one withdrawal per month at one of the in-network ATMs – which include Comerica Bank, Charter One, Privileged Status, Alliance One, PNC Bank, MasterCard ATM Alliance, and MoneyPass – completely free of charge. However, if someone makes more than one ATM withdrawal per month at an in-network ATM, it costs 90 cents per withdrawal. Additional fees, which can be as much as $3, also apply to withdrawals at out-of-network ATMs. Receiving a paper statement in the mail will cost another 75 cents per month.
 
By eliminating printing and postage costs for Social Security checks, the government expects to save $1 billion over the next ten years.

Six Year-End Tips to Reduce 2011 Taxes

The IRS wants to remind all taxpayers that with the New Year fast approaching, there is still time for you to take steps that can lower your 2011 taxes. However, you usually need to take action no later than Dec. 31 in order to claim certain tax benefits. Here are six tax-saving tips for you to consider before the calendar turns to 2012:

1. Make Charitable Contributions – If you itemize deductions, your donations must be made to qualified charities no later than Dec. 31 to be deductible for 2011. You must have a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations. Donations charged to a credit card by Dec. 31 are deductible for 2011, even if the bill isn't paid until 2012. If you donate clothing or household items, they must be in good used condition or better to be deductible.

2. Install Energy-Efficient Home Improvements – You still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits. Installing energy efficient improvements such as insulation, new windows and water heaters to your main home can provide up to $500 in tax savings. Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment. The credit equals 30 percent of the cost of qualifying solar, wind, geothermal, or heat pump property. For details see Special Edition Tax Tip 2011-08, Home Energy Credits Still Available for 2011 on the IRS.gov website.

3. Consider a Portfolio Adjustment – Check your investments for gains and losses and consider sales by Dec. 31. You may normally deduct capital losses up to the amount of capital gains, plus $3,000 from other income. If your net capital losses are more than $3,000, the excess can be carried forward and deducted in future years.

4. Contribute the Maximum to Retirement Accounts – Elective deferrals you make to employer-sponsored 401(k) plans or similar workplace retirement programs for 2011 must be made by Dec. 31. However, you have until April 17, 2012, to set up a new IRA or add money to an existing IRA and still have it count for 2011. You normally can contribute up to $5,000 to a traditional or Roth IRA, and up to $6,000 if age 50 or over. The Saver’s Credit, also known as the Retirement Savings Contribution Credit, is also available to low- and moderate-income workers who voluntarily contribute to an IRA or workplace retirement plan. The maximum Saver’s Credit is $1,000, and $2,000 for married couples, but the amount allowed could be reduced or eliminated for some taxpayers in part because of the impact of other deductions and credits.

5. Make a Qualified Charitable Distribution – If you are age 70½ or over, the qualified charitable distribution (QCD) allows you to make a distribution paid directly from your individual retirement account to a qualified charity, and exclude the amount from gross income. The maximum annual exclusion for QCDs is $100,000. The excluded amount can be used to satisfy any required minimum distributions that the individual must otherwise receive from their IRAs in 2011. This benefit is available even if you do not itemize deductions.

6. Don't Overlook the Small Business Health Care Tax Credit – If you are a small employer who pays at least half of your employee health insurance premiums, you may qualify for a tax credit of up to 35 percent of the premiums paid. An employer with fewer than 25 full-time employees who pays an average wage of less than $50,000 a year may qualify. For more information see the Small Business Health Care Tax Credit page on IRS.gov.

And here is one final tip to remember: you should always save receipts and records related to your taxes. Good recordkeeping is a must because you need records to prepare your tax return, and it will help you to file quickly and accurately next year.

Wrangling Continues over the Payroll Tax Cut

Time is running out before the payroll tax rate automatically increases in two weeks, and the dispute over how to fund it continues.
 
The tax measure at issue would maintain the payroll tax rate at 4.2 percent for the year 2012 instead of allowing it to revert to 6.2 percent January 1. It's a tax cut worth about $1,000 to families earning $50,000 a year. The payroll tax bill also would renew benefits for the long-term unemployed and prevent a cut in Medicare benefits for seniors.
 
This morning (December 19), the Associated Press reported that "Boehner spoke after a chaotic weekend in which Senate leaders first failed to agree on a full-year bill, then coalesced around the two-month extension that passed overwhelmingly, only to spark a revolt among GOP conservatives in the House."
 
Here's a summary of what's been happening:
 
While the GOP-led House passed a bill on December 14 extending the tax cut, the legislation relied on a pay freeze and increased pension contributions for civilian federal employees. In addition, it raised Medicare premiums for seniors, and it raised a fee that's charged to banks with mortgages guaranteed by Fannie Mae and Freddie Mac. The bill didn't have the votes to pass the Senate.
 
On Friday, December 16, Senate leaders reached an agreement to pass a two-month extension on the payroll tax cut, keeping the 4.2 percent rate through February. The agreement requires the administration to decide within 60 days if the controversial 1,700-mile Keystone XL pipeline is in the nation's best interests. Some environmental groups oppose the project, but several unions support it.
 
Senate Republican Leader, Mitch McConnell, said Keystone XL would create about 20,000 jobs. Critics say the figure would be fewer than 3,500, including fewer than 1,000 that would be permanent.
 
House Speaker, John Boehner, said Friday that his chamber will not sign off on an extension of the payroll tax cut without including a provision to force a quick decision on the pipeline construction.
 
Obama would prefer to postpone the controversial matter, and he threatened to veto any bill that forces a decision. Because the project crosses international borders, it requires White House approval. The administration complained that House Republicans are injecting "ideological issues into what should be a simple debate about cutting taxes for the middle class."

Plan Now to Get Full Benefit of Saver’s Credit

Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2011 and the years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2011 tax return. People have until April 17, 2012, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2011. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2012 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

    Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012;
    Heads of Household with incomes up to $42,375 in 2011 or $43,125 in 2012; and
    Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

In tax-year 2009, the most recent year for which complete figures are available, saver’s credits totaling just over $1 billion were claimed on just over 6.25 million individual income tax returns. Saver’s credits claimed on these returns averaged $202 for joint filers, $159 for heads of household and $121 for single filers.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

    Eligible taxpayers must be at least 18 years of age.

    Anyone claimed as a dependent on someone else’s return cannot take the credit.

    A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

    Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2011, this rule applies to distributions received after 2008 and before the due date, including extensions, of the 2011 return.

Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. More information about the credit is on IRS.gov.

IRS Announces 2012 Standard Mileage Rates

The Internal Revenue Service issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

    55.5 cents per mile for business miles driven
    23 cents per mile driven for medical or moving purposes
    14 cents per mile driven in service of charitable organizations

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.

Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

IRS Offers Tips for Year-End Giving

Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years. Some of these changes include the following:

Special Charitable Contributions for Certain IRA Owners

This provision, currently scheduled to expire at the end of 2011, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, created in 2006, is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

Rules for Clothing and Household Items

To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Congress Salutes Veterans with New Hiring Tax Credits

President Obama signed new legislation providing a tax credit to employers who hire military veterans. The VOW to Hire Heroes Act is a small piece of a much larger jobs bill that has stalled in Congress.
 
According to White House data, approximately 240,000 veterans of the wars in Iraq and Afghanistan remain unemployed, while a total of 850,000 veterans overall are out of work. To compound the problem, the Obama administration reports that 1 million other service members are expected to return to civilian life by 2016. "No veteran who fought for our nation should have to fight for a job when they come home," said the president.
 
The new law allows a company to claim a tax credit of up to $2,400 if it hires veterans who have been looking for work for at least one month. The maximum credit is increased to $5,600 for hiring veterans who have been searching for work at least six months. And employers may be granted a $9,600 tax credit for hiring out-of-work veterans with service-related disabilities. The new legislation also provides job training to help returning vets return to work.
 
Under prior law, qualified veterans are included as one of the target groups eligible for the Work Opportunity Tax Credit (WOTC). The WOTC is currently scheduled to expire after December 31, 2011.
 
A Department of Defense official said that the agency will expand its programs to help returning veterans."Combat is incredibly tough business, and we are finding that the human toll on a 10-year veteran, the physical and mental toll, it is incredible," said Philip Burdette, principal director of the Office of Wounded Warrior Care and Transition Policy. "As we end the war in Iraq and wind down in Afghanistan, we are absolutely planning for returning service members."
 
Finally, in a separate provision, the new legislation repeals the three percent withholding requirement for payments made by federal, state, and local governments to contractors for goods and services. The withholding requirement, which was established by a 2006 law, was scheduled to take effect in 2013.

Charitable Rollovers Are Set to Fall off the Table

Unless Congress takes action soon, on December 31, 2011, a unique tax break for senior citizens will be wiped off the books. This tax law provision allows qualified taxpayers to "roll over" funds tax-free from an IRA to a charity.

But there's a major drawback to the deal. Unlike a regular charitable gift, the donor isn't entitled to a deduction for the amount of the rollover. In essence, this technique creates a tax return "wash"; however, it can provide other benefits worth considering.

Background: Under the Pension Protection Act of 2006 (PPA), a taxpayer age 70½ or older can choose to transfer funds directly from an IRA to a qualified charitable organization. The annual limit on rollovers is $100,000 per taxpayer. Although no tax deduction is permitted, donors aren't taxed on the distribution either. The PPA provision, which initially expired in 2007, was reinstated and extended through 2009. Recent tax legislation extended the tax break through 2011 and permitted retroactively for 2010.

Note that the distribution must be made directly from the IRA trustee to the charitable organization. In other words, the taxpayer can't use the funds and then transfer the cash to the charity. It has to be a straight shot.

In addition, the contribution must otherwise qualify as a tax-deductible charitable donation. For instance, if the deductible amount would be disallowed due to inadequate substantiation or would be decreased because the donor received a benefit in return, the tax exclusion wouldn't apply to any part of the IRA distribution.

Be aware that a rollover can be made from a Roth IRA if a portion of the distribution would be taxable (e.g., distributions from a Roth in existence fewer than five years). In general, it makes sense to exhaust the funds in a traditional IRA first. Subsequent distributions from a Roth may be tax-free of their own accord.

Extra benefit: Once reaching age 70½, they must begin taking Required Minimum Distributions (RMDs) from their IRAs. RMDs are taxed at highly taxed, ordinary income rates. Failing to take an RMD generally results in a penalty equal to 50 percent of the amount that should have been withdrawn; however, the amount rolled over from an IRA to charity counts as an RMD. Therefore, it's possible to meet this requirement without paying tax and contribute to a worthy cause at the same time.

Furthermore, the benefit from this technique would be if charitable deductions would otherwise be limited by other tax law provisions. Finally, the tax-free rollover may effectively lower the tax that a retiree must pay on Social Security benefits and reduce a taxpayer's adjusted gross income (AGI) for various other tax purposes.

IRS to Host Public Meeting Dec. 8 on Real-Time Tax System

The Internal Revenue Service will kick off a series of public meetings  Thursday, Dec. 8 to gather feedback on how to implement a series of long-term changes to the tax system described by IRS Commissioner Doug Shulman in an April 2011 speech at the National Press Club.  In that speech, the Commissioner described a vision where the IRS would move away from the traditional “look back” model of compliance, and instead perform substantially more “real time,” or upfront matching of tax returns when they are first filed with the IRS.  The goal of this initiative is to improve the tax filing process by reducing burden for taxpayers and improving overall compliance upfront.

Under the vision of a real-time tax system, the IRS could match information submitted on a tax return with third-party information right up front during processing and could provide the opportunity for taxpayers to fix the tax return before acceptance if it contains data that does not match IRS records

By contrast, today the IRS conducts a significant number of compliance activities months after the tax return has been filed and processed.  It is not uncommon for a taxpayer to receive a notice 12 to 18 months after a tax return is filed.  This after-the-fact compliance approach can create problems and frustrations for both taxpayers and the IRS.

At the public meetings, IRS officials will solicit feedback and input from outside stakeholders to provide comments and insight. The first meeting will feature representatives of consumer groups, the tax professional community and government representatives.  A future public meeting will include, among others, representatives of the employer and payroll community, the software industry, financial institutions and additional government representatives. 

The first meeting, scheduled at 9:00 a.m. on Dec. 8, will take place at the IRS Headquarters Building Auditorium, 1111 Constitution Ave., NW, Washington, D.C.

The next public meeting will be held early next year.

IRS Seeks to Return $153 Million in Undelivered Checks to Taxpayers

In an annual reminder to taxpayers, the Internal Revenue Service announced today that it is looking to return $153.3 million in undelivered tax refund checks. In all, 99,123 taxpayers are due refund checks this year that could not be delivered because of mailing address errors.

Undelivered refund checks average $1,547 this year.

Taxpayers who believe their refund check may have been returned to the IRS as undelivered should use the “Where’s My Refund?” tool on IRS.gov. The tool will provide the status of their refund and, in some cases, instructions on how to resolve delivery problems.

Taxpayers checking on a refund over the phone will receive instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.

While only a small percentage of checks mailed out by the IRS are returned as undelivered, taxpayers can put an end to lost, stolen or undelivered checks by choosing direct deposit when they file either paper or electronic returns. Last year, more than 78.4 million taxpayers chose to receive their refund through direct deposit. Taxpayers can receive refunds directly into their bank account, split a tax refund into two or three financial accounts or even buy a savings bond.

The IRS also recommends that taxpayers file their tax returns electronically, because e-file eliminates the risk of lost paper returns. E-file also reduces errors on tax returns and speeds up refunds. Nearly 8 out of 10 taxpayers chose e-file last year. E-file combined with direct deposit is the best option for taxpayers to avoid refund problems; it’s easy, fast and safe.

The public should be aware that the IRS does not contact taxpayers by e-mail to alert them of pending refunds and does not ask for personal or financial information through email.  Such messages are common phishing scams.  The agency urges taxpayers receiving such messages not to release any personal information, reply, open any attachments or click on any links to avoid malicious code that can infect their computers.  The best way for an individual to verify if she or he has a pending refund is going directly to IRS.gov and using the “Where’s My Refund?” tool.

Before You Hire Your First Employee

First assess the implications of putting workers on payroll. Then limit future legal headaches by creating an employment policy.

From Karen E. Klein, a Los Angeles-based writer who covers entrepreneurship and small-business issues.

The decision to move from self-employed to employer is among the most important a business owner must make. The added cost of employees can swamp a young company, particularly in an economic downturn or if there’s a sudden decline in business.

The most cautious strategy would be to wait until demand dictates that you must hire—because, say, you are routinely turning down work—and when you do, hire people who add to your bottom line, such as sales or administrative employees.

It is frustrating to work exclusively with “sidepreneurs”—people who leverage expertise from full-time jobs but can never make your projects their top priority, says Rhonda Abrams, president of PlanningShop, a Palo Alto (Calif.) publisher, and author of Successful Business Plan: Secrets and Strategies. “I’m in a similar situation, and it’s very difficult when you can’t even schedule a meeting with all the people you need, because one’s available only at noon and someone else is available only on Tuesdays,” she says.

LOSING FLEXIBILITY

But once you move from independent contractors to employees, you’re “changing your business model from variable-cost, low-regulation, and highly flexible to fixed-cost, highly regulated, and somewhat inflexible,” says Derek Alderton, a business consultant and lecturer at the UCLA Anderson School of Management. At least in the U.S., employers must meet a host of tax and labor requirements. And it would be far more difficult to lay off an employee if your projects were to dry up.

Here are some exercises to help you plan:

1. Calculate financial impact. Familiarize yourself with laws and costs that apply to employers in your country. Be sure to include “not only their direct salary or wage, but also the employer share of taxes, insurance, holidays, and vacation time,” says Gene Fairbrother, chief executive officer of MBA Consulting in Dallas. “At the very least, get your CPA to show you what last year’s financial results would have looked like if you had been complying with all the costs and regulations for employees, rather than project contractors,” Alderton says.

2. Consider alternatives. Could you hire student interns, temps, or part-time employees as a way to test the waters? “An intern or recent graduate can be hired full time per project or for a set time with the possibility of full-time employment depending on the growth of the firm,” says Philip Moorcroft, president of MGPS, an expense management consulting firm in Toronto. Bringing in a temporary employee or hiring a contractor as a part-time employee could increase the attention paid to your projects, minimize your costs, and allow the contractor more time to expand his or her moonlighting to make up for lost wages.

3. Make realistic projections. “When you’re working on a project-to-project basis, you don’t know how long things are going to last,” Abrams says. “Look over your existing contracts and see how many are ongoing, or could become ongoing. Then hustle to get signatures on proposals so you will be more confident about the future.”

If you want to expand your company, at some point you will need to bite the bullet. “The virtual company goes only so far,” Abrams notes. When you do hire, start slowly and be ready to deal with fallout from your existing contractors, Alderton says. “They will rightly perceive the new employee as being a threat to their own incomes or choice of desirable projects.”

Even with just one employee, you should create a manual that states your employment policies in writing, Fairbrother recommends. “Having your policies in place could save you considerable confusion and headaches later on, including legal costs if an employee or ex-employee challenges you,” he says. Search for sample employee manuals online or buy software that allows you to develop your own handbook. He recommends Nolo Press’s Create Your Own Employee Handbook.

[Once you've decided to hire your first employee, remember to call Hershkowitz & Kunitzer, P.A. to discuss your payroll processing options!]

The information found here is from the article "Before You Hire Your First Employee" by Karen E. Klein published by Bloomberg Businessweek.

Home Energy Credits Still Available for 2011

The IRS reminds homeowners that they still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits.

The Nonbusiness Energy Property Credit is aimed at homeowners installing energy efficient improvements such as insulation, new windows and furnaces. The credit is more limited than in the past years, but can still provide substantial tax savings.

• The 2011 credit rate is 10 percent of the cost of qualified energy efficiency improvements. Energy efficiency improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs. The cost of installing these items does not count.

• The credit can also be claimed for the cost of residential energy property, including labor costs for installation. Residential energy property includes certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel.

• The credit has a lifetime limit of $500, of which only $200 may be used for windows. If the total of nonbusiness energy property credits taken in prior years since 2005 is more than $500, the credit may not be claimed in 2011.

• Qualifying improvements must be placed into service to the taxpayer’s principal residence located in the United States before January 1, 2012.

Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment.

• The credit equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property.

• No cap exists on the amount of credit available except for fuel cell property.

• Generally, labor costs are included when figuring this credit.

Not all energy-efficient improvements qualify for these tax credits, so homeowners should check the manufacturer’s tax credit certification statement before they purchase. Taxpayers can normally rely on this certification statement which can usually be found on the manufacturer’s website or with the product packaging.
 
Eligible homeowners can claim both of these credits on Form 5695, Residential Energy Credits when they file their 2011 federal income tax return. Because these are credits and not deductions, they reduce the amount of tax owed dollar for dollar. An eligible taxpayer can claim these credits regardless of whether he or she itemizes deductions on Schedule A.

5 Reasons Selling Your Business Is Like Thanksgiving Dinner

From Barbara Taylor, co-owner of the business brokerage firm, Synergy Business Services, in Bentonville, Arkansas:

I had a professor in graduate school who once compared the world of business to Thanksgiving dinner. His comment was directed at a room full of students who, at the time, were intent on climbing the corporate ladder. According to him, those of us who were willing to work hard and get advanced degrees would have the ability to leave the chaos and humiliation of “the little kids’ table” (supervisory and front line management positions) and graduate to sitting with the grown-ups (director level and above). And wasn’t that what we all aspired to?

In lieu of another tired business analogy that revolves around sports or military strategy, here are five reasons why selling your business is like Thanksgiving dinner.

An emotional outburst can ruin an otherwise lovely gathering.
I’ve often thought of my professor’s description of the little kids’ table as I’ve watched small-business owners go through the process of selling. It is not uncommon to see tears, yelling and tantrums on the sell side of a deal. The buyer, who brings almost no emotional baggage to the table, rarely exhibits such behavior.

Selling a business is an emotionally charged event. So much so that I have rarely seen an instance where a business owner doesn’t “lose it” at some point during the process. Anyone familiar with the process knows that an emotional issue can kill a deal just as quickly as any detail uncovered on a financial statement.

There are books and organizations dedicated to helping business owners anticipate and overcome the emotional challenges that come with selling a business. If you haven’t reached a point where you can be objective about your business, discuss its strengths and weaknesses openly, and see it for what it is during the sale process — namely an asset with market value — then you may not be ready to sell.

There’s no substitute for experience.
Grandmothers make the best Thanksgiving dinners, hands down. This is presumably because they’ve prepared the meal 30 times before they become grandmothers. Successful business sales take place with a team of experienced professionals who are both generalists and specialists in their field — including lawyers, accountants, financial planners and intermediaries.

Small-business owners tend to be extraordinarily successful do-it-yourselfers. When my husband and I started our coffee business I decided I would take care of payroll myself. How hard could it be, I reasoned, and why not save the $45 per month I was going to pay a service to do it? Somewhere along the road to employing 14 baristas, I should have started filing my employee withholding monthly instead of quarterly. Being a newbie, I didn’t realize this until I got a nasty letter from the Internal Revenue Service saying that I was behind and that if I didn’t get current they would seize everything I owned. Oops.

When it comes to selling your business, don’t go it alone. The cost of inexperience is simply too high.

Timing is critical.
The real trick to Thanksgiving dinner is getting everything to the table piping hot at the same time. And so it goes with selling a business. Most business owners pick an inopportune time to sell that is based on their personal wants and needs, rather than when the business will get the most interest from buyers — and the best price on the open market. It can be difficult to do, but the best time to sell is when your business is going gangbusters and your industry shows plenty of opportunity for growth.

Good manners are expected.
Like the passing of dishes around the table at Thanksgiving dinner, the process of selling a business consists of a series of careful exchanges — an orderly back and forth between buyer and seller, managed so that everyone is satisfied.

If you’ve represented your business as having $2 million in annual sales and $350,000 in owner’s benefit, you will be asked to please pass every financial statement, tax return and sales receipt to support that claim in due diligence. Refusing to do so, or not relinquishing those items in their entirety, in proper order and in a timely manner is not acceptable. It’s the equivalent of throwing mashed potatoes at Thanksgiving.

Everyone looks forward to dessert.
Thanksgiving dinner without the pumpkin pie would be a major letdown. Building a successful business that has no transferable value seems equally disappointing. Selling your business and cashing out after years of hard work is the ultimate reward. Prepare yourself and your business well for the day you will leave, and when you do, you will savor a slice of success that many business owners never enjoy.

[Always remember to consult your CPA for business valuation services if you're considering selling your business!]

The information found here is from the article "5 Reasons Selling Your Business Is Like Thanksgiving Dinner" by Barbara Taylor published in the Small Business section of the New York Times.

Why Few Employers Use Health-Care Tax Credits

Low exploitation rates for tax breaks intended to encourage small business owners to provide health insurance are prompting complaints that the credits aren't practical.

Small business health insurance tax credits went into effect in March 2010 as part of the Patient Protection and Affordable Care Act that was a centerpiece of President Barack Obama’s early legislative agenda. A U.S. House Ways and Means oversight subcommittee recently scheduled a hearing on the credits to take place on Nov. 15 to explore whether the credit is “providing meaningful help to employers.”

The U.S. Treasury Inspector General for Tax Administration’s early numbers show that in the first year of the small business health insurance tax credit, approximately 228,000 small businesses claimed $278 million—only about 14 percent of eligible businesses. The number is incomplete because it was calculated in May and many small businesses file returns on extension in the fall. However, more recent estimates that $435 million in claims were filed still fall far short of Congressional Budget Office projections that taxpayers would claim up to $2 billion in 2010.

Since the disappointing figures were released, charges have been flying among small business advocacy groups, accounting organizations, and the government officials who conceived the credit as a way to encourage small business owners to provide insurance for their employees. A September 2011 Small Business Administration study shows that employees of small businesses are far less likely to be insured than those working for midsized and larger companies and that coverage costs small employers and their employees more.

A POLITICAL TOOL?

The low participation rate was predictable, says William Dennis, senior research fellow at the National Federation of Independent Business Research Foundation in Washington. The NFIB has filed a legal challenge against the health-care legislation, claiming it is unconstitutional to mandate the purchase of health insurance. “It [the small business credit] was put in there as a talking point for political reasons; it wasn’t a serious thing. It was predestined to fail,” Dennis says.

Administration officials deny this, saying the credit was passed as a good-faith effort to bridge the gap for small employers until 2014, when they can sign up for insurance exchanges that will increase competition and theoretically bring costs down. Acting Assistant Treasury Secretary for Tax Policy Emily McMahon explained on her tax policy blog that it was no surprise that numbers for 2010 were low because by the time the legislation went into effect, most businesses were unable to adjust employee coverage to take advantage of the credit. More small businesses may claim the credit on their 2011 returns and beyond, she wrote.

McMahon also mentioned that the IRS is continuing its outreach to small employers, insurance brokers, accountants, and the tax software industry to improve awareness of the tax credits. This year, the IRS sent out 4.4 million postcards to small businesses notifying them they might be eligible for the tax break.

Tax preparers say it wasn’t lack of information about the credits that dampened participation, but the complex formula governing eligibility. The tax credit is generally available to business owners who pay for at least half the cost of employees’ insurance coverage, have fewer than 25 employees, and pay salaries that average less than $50,000 annually.

ELIGIBILITY TOUGH TO DETERMINE

Pat Thompson, a tax partner at Piccerelli, Gilstein & Co. in Providence and chair of the American Institute for Certified Public Accountants’s tax executive committee, says very few of her small business clients were eligible for the credit and fewer still were able to determine eligibility for themselves, using a worksheet her firm had designed. “The definition of an eligible business is challenging because it’s not based on [the number of] employees but on full-time equivalents,” she says. “For companies with a lot of part-timers … that’s not very transparent.”

Add in the requirement that different insurance plans—such as medical and dental—must be tested separately, then factor in the issue of average annual wages, she says, and the credit was just too difficult for business owners to decipher without help. The credit was cast narrowly to appeal to the companies least able to afford insurance, but those companies are probably also least likely to have their taxes done professionally. “If a person is trying to prepare their tax returns themselves, I don’t think they would even consider this credit,” Thompson says.

John Arensmeyer, chief executive officer of advocacy group Small Business Majority, which supported the health-care reform effort, blames the low participation on general confusion about the health-care reform act (to which the Supreme Court will hear a challenge this term), as well as resistance from the accounting community. “We’d like to see a renewed commitment on the part of all concerned—particularly organizations dedicated to supporting small business—to make sure we communicate to small businesses about the tax credit and make it as easy as possible to take advantage of it.”

The information found here is from the article, "Why Few Employers Use Health-Care Tax Credits" by Karen E. Klein published by Bloomberg Businessweek.

U.S. House Approves Looser SEC Rules for Closely Held Firms

The U.S. House passed two measures aimed at removing barriers to investments in closely held firms, including a proposal President Barack Obama’s administration backed in its jobs package.

House lawmakers voted 407-17 to pass a measure that would exempt from Securities and Exchange Commission registration firms that solicit and pool small investments, often online, of up to $1 million. The practice, known as crowdfunding, garnered bipartisan support after Obama’s Sept. 8 speech to Congress.

“What we’re doing is giving investors the power, the opportunity and relieving this restriction that prevents them from having an equity stake in their favorite business, their favorite idea, their local coffee shop, their favorite band or even the next Facebook,” Patrick McHenry, a North Carolina Republican and the sponsor of the measure, said on the House floor before the vote.

Lawmakers in the Republican-led House have found bipartisan consensus this week on four measures that would loosen SEC rules.

Representative Kevin McCarthy, the third-ranked Republican in the House, sponsored a second bill passed today that would allow closely held firms to market offerings to accredited investors. The SEC currently bans closely held firms from soliciting funding from investors.

“This opens up a whole new group of capital for someone that has an idea, even if they don’t have a prior relationship,” McCarthy, of California, said today in an interview. “If you have an idea, you have another opportunity to try to raise capital to go to the market.”

The House passed the measure 413-11.

Senate

Both measures now move to the Senate, where lawmakers have yet to consider similar legislation. McCarthy said he hoped the bipartisan support would serve as the impetus for action in the other chamber.

Both measures have drawn opposition from state securities regulators, with McHenry’s crowdfunding proposal originally drawing objections from Democrats on the Financial Services Committee. The sponsors agreed to changes that would give states notifications of offerings and allow state regulators to continue to take enforcement action against fraud or unlawful content.

“We need to have protection for investors as businesses seek to form and develop capital,” Representative Ed Perlmutter, a Democrat from Colorado, said today on the House floor.

McHenry’s measure would allow companies to raise up to $2 million if they provide audited financial statements to regulators. Investors would be able to contribute up to $10,000 or 10 percent of their annual income, whichever is less.

The White House, in a statement of administration policy yesterday, said the bill is “is broadly consistent” with the president’s proposal.

“This bill will make it easier for entrepreneurs to raise capital and create jobs,” the Office of Management and Budget said in the release.

The information found here is from the article, "U.S. House Approves Looser SEC Rules for Closely Held Firms" by Phil Mattingly published by Bloomberg Businessweek.

A Verification System for New Hires Backfires

Two years ago the Asheville (N.C.) rumor mill lit up with speculation that local flower wholesaler Van Wingerden International was hiring undocumented workers. To ensure that he take on only legal employees, co-owner Bert Lemkes enrolled the $20 million business in E-Verify, a federal program that matches data on new hires, such as Social Security numbers, with government records.

Lemkes says E-Verify has made it harder to find enough workers for his 37 acres of greenhouses, especially during spring growing season, when he employs up to 350 people. Though the U.S. unemployment rate is stalled above 9 percent, business owners such as Lemkes say few native-born workers are willing to do tough jobs, leading employers to hire immigrants. “Those who want to work fail to pass E-Verify, and those that pass fail to work,” he says.

E-Verify can be used only to check immigration status after a worker is hired, not to screen job candidates or check on existing employees. Lemkes says he has had to fire more than 60 recent hires. Although E-Verify’s proponents argue the unemployed will replace the undocumented, Lemkes says that hasn’t happened. “Without comprehensive immigration reform, [verification requirements are] going to kill agriculture,” he says.

At its launch in 1997, E-Verify was voluntary, and today about 300,000 employers—less than 5 percent of U.S. companies—use it. As states strengthen sanctions against illegal immigrants, 18 have passed laws making the program mandatory for certain employers, according to the National Conference of State Legislatures. In five states—Alabama, Arizona, Mississippi, South Carolina, and Tennessee—all employers are required to use it or will be by 2013; in three others, all but the smallest companies will have to use it by then. On Sept. 21 a congressional committee passed a measure by Representative Lamar Smith (R-Tex.) that would require use of E-Verify by all U.S. businesses, including those with just one employee.

Some farmers, contractors, and restaurant owners who rely on foreign-born labor argue that a patchwork of regulations will prompt undocumented laborers to cross state lines or work for employers who pay them off the books. Small companies will be particularly burdened by E-Verify because they lack dedicated human resources staff to manage the system, says Rebecca Smith, an attorney at the National Employment Law Project. While businesses with fewer than 500 workers employ about half the U.S. labor force, if the program were mandatory those companies would bear 99 percent of the $2.7 billion in costs for E-Verify (mostly paying their own staffers or consultants to do the searches), Bloomberg Government estimates.

Opponents worry that more full-timers will be registered as contract workers by companies seeking to avoid E-Verify, cutting payroll tax revenues. “You bring on E-Verify, that simply pushes more illegal immigrants over to employers who are willing to misclassify them as independent contractors,” says Norm Adams, a Houston insurance broker who helped defeat legislation that would have mandated use of E-Verify in Texas. “The more E-Verify laws we have in this country, the more payroll taxes we’re going to lose.” A 2008 Congressional Budget Office report estimates that requiring E-Verify nationally would cut federal tax revenue by more than $17 billion.

In Arizona, where E-Verify became mandatory in 2008, the program has caused worker shortages across industries from construction to food service, says Julie Pace, an employment lawyer in Phoenix. “They can’t find the workers,” Pace says. “It’s a big cost that is not captured in the use of E-Verify.” Still, she supports making the program mandatory nationwide so all employers share an equal burden, which could prompt Congress to create a “logical and reasonable guest worker program to really meet the labor needs of this country.”

The information found here is from the article, "A Verification System for New Hires Backfires" by Nick Leiber published by Bloomberg Businessweek.

In 2012, Many Tax Benefits Increase Due to Inflation Adjustments

For tax year 2012, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation, the Internal Revenue Service announced today.

By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following:

The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.

The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.

Credits, Deductions, and Related Phase Outs

For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.

The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts to $2,100 for self-only coverage and $4,200 for family coverage for the minimum annual deductible; $3,150 for self-only coverage and $6,300 for family coverage for the maximum annual deductible; and $4,200 for self-only coverage and $7,650 for family coverage for the maximum annual out-of-pocket expenses.

The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Estate and Gift

For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.

The annual exclusion for gifts remains at $13,000.

Other Items

The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.

Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains $1,150 for married individuals and $1,450 for singles and heads of household.

IRS Issues Proposed Regulations That Would Require Tax Preparers to File Due Diligence Checklist wit

The Internal Revenue Service announced today that it is issuing proposed regulations that would require paid tax return preparers, beginning in 2012, to file a due diligence checklist, Form 8867, with any federal return claiming the Earned Income Tax Credit (EITC). It is the same form that is currently required to be completed and retained in a preparer’s records.

The due diligence requirement, enacted by Congress over a decade ago, was designed to reduce errors on returns claiming the EITC, most of which are prepared by tax professionals.

The IRS created Form 8867, Paid Preparer's Earned Income Credit Checklist, to help preparers meet the requirement by obtaining eligibility information from their clients. Preparers have been required to keep copies of the form, or comparable documentation, which is subject to review by the IRS. To help ensure compliance with the law and that eligible taxpayers receive the right credit amount, the proposed regulations would require preparers, effective Jan. 1, 2012, to file the Form 8867 with each return claiming the EITC.

Further details can be found in REG-140280-09. Comments on the proposed regulations are due by Nov. 10, 2011, and a public hearing on the proposed regulations is scheduled for Nov. 7, 2011.

The EITC benefits low-and moderate-income workers and working families and the tax benefit varies by income, family size and filing status. Unlike most deductions and credits, the EITC is refundable –– taxpayers can get it even if they owe no tax. For 2011 tax returns, the maximum credit will be $5,751.

Although as many as one in five eligible taxpayers fail to claim the EITC, some of those who do claim it either compute it incorrectly or are ineligible. The IRS is proposing this step as part of its efforts to ensure that the credit is afforded to taxpayers who qualify. For 2009, over 26 million people received nearly $59 billion through the EITC. Tax professionals prepare close to 66 percent of these claims.

About the Small Business Health Care Tax Credit

The Internal Revenue Service, in partnership with the Department of Health and Human Services, is announcing a new round of outreach to small employers and the professional service providers they rely on to encourage them to review the new Small Business Health Care Tax Credit to see if they are eligible.

"As the filing deadlines approach, we want to make sure that small business owners don't leave any money on the table,” said IRS Commissioner Doug Shulman. “Small businesses that offer health insurance should learn about this credit and claim it if they are eligible."

The small business health care tax credit was included in the Affordable Care Act enacted last year. 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. 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.

Small employers face two important tax filing deadlines in coming weeks:

    September 15. Corporations that file on a calendar year basis and requested an extension to file to September 15 can calculate 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 corporate income tax return.
    October 17. Sole proprietors who file Form 1040 and partners and S-corporation shareholders who report their income on Form 1040 and request an extension have until October 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.

In addition, tax-exempt organizations that file on a calendar year basis and requested an extension to file to November 15 can use Form 8941 and then claim the credit on Form 990-T, Line 44f.

As these 2010 tax return deadlines approach and businesses begin planning for the end of 2011 and 2012, the IRS’s new outreach campaign will focus on working with our partners:

1. The tax software industry to improve access to educational information and to help alert small employers and practitioners when taxpayers may be eligible for the credit.
2. Insurance agents, brokers and carriers who work with small businesses to help ensure that participants in the health insurance marketplace understand the features and benefits of the credit. The Department of Health and Human Services today sent an email to 2,000 agents and brokers alerting them to the credit for their small business clients.
3. The small business and tax practitioner community to provide additional webinars and educational opportunities about the credit.

Information will also be available through social media and other venues, including IRS YouTube videos in English, Spanish and American Sign Language. Targeted e-mails and tweets will be sent to the small business community and tax preparers. The IRS’s new outreach effort will remind employers about the upcoming extension deadlines and will also provide details on other important information about the credit, including:

1. 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.
2. Businesses without tax liability this year can still benefit: The Small Business Jobs Act of 2010 provided that for Tax Year 2010, eligible small businesses may carry back unused general business credits (including the small employer health care tax credit) five years. Previously these credits could only be carried back one year. Small businesses that did not have tax liability to offset in 2010 should still evaluate eligibility for the small business health care tax credit in light of this expanded carry back opportunity.
3. Businesses that couldn’t use the credit in 2010 can 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.

Treasury, IRS Seek Public Input on Certain Employer Provisions of the Affordable Care Act

The Treasury Department and Internal Revenue Service requested public comment on a proposed affordability safe harbor for employers under the shared responsibility provisions included in the Affordable Care Act that will apply to certain employers starting in 2014.

Under the Affordable Care Act, employers with 50 or more full-time employees that do not offer affordable health coverage to their full-time employees may be required to make a shared responsibility payment. Notice 2011-73, posted today on IRS.gov, solicits public input and comment on a proposed safe harbor, designed to make it easier for employers to determine whether the health coverage they offer is affordable. To that end, Treasury and IRS expect to propose a safe harbor permitting employers that offer coverage to their employees to measure the affordability of that coverage by using wages that the employer paid to an employee, instead of the employee’s household income. This contemplated safe harbor would only apply for purposes of the employer shared responsibility provision, and would not affect employees’ eligibility for health insurance premium tax credits.

Today’s request for comment is designed to ensure that Treasury and IRS continue to receive broad input from stakeholders on how best to implement the shared responsibility provisions in a way that is administrable, allows flexibility, and minimizes burden. By soliciting comments and feedback now, Treasury and IRS are giving all interested parties the opportunity for input before proposed regulations are issued.

There are three ways to submit comments.

E-mail to: Notice.Comments@irscounsel.treas.gov. Include “Notice 2011-73” in the subject line.

Mail to: Internal Revenue Service, CC:PA:LPD:PR (Notice 2011-73), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

Hand deliver to: CC:PA:LPD:PR (Notice 2011-73), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC, between 8 a.m. and 4 p.m., Monday through Friday.

The deadline for comments is December 13, 2011.

IRS Provides Tax Relief to Victims of Hurricane Irene

The IRS announced that certain taxpayers in North Carolina, New Jersey, New York and Puerto Rico will receive tax relief, and other locations are expected to be added in coming days following additional damage assessments by the Federal Emergency Management Agency (FEMA).

Watch the IRS page 'Tax Relieft in Disaster Situations' for updates.

IRS Gives One-Week Filing Extension to Taxpayers Whose Preparers Were Affected by Hurricane Irene

The Internal Revenue Service today announced it is granting taxpayers whose preparers were affected by Hurricane Irene until Sept. 22 to file returns normally due Sept. 15. The taxpayer’s preparer must be located in an area that was under an evacuation order or a severe weather warning because of Hurricane Irene, even if the preparer is located outside of the federally declared disaster areas.

This relief, which primarily applies to corporations, partnerships and trusts that previously obtained a tax filing extension, is available to taxpayers regardless of their location.

This relief does not apply to any tax payment requirements.

This relief is in addition to the filing and payment relief the IRS is providing to taxpayers located in disaster areas declared by the Federal Emergency Management Agency (FEMA). For details, visit Tax Relief in Disaster Situations on the IRS website.

IRS Statement on Airline Ticket Taxes

Congressional action extending the Federal Aviation Administration authorization reinstates retroactively the airline ticket taxes for passengers who traveled during the lapse of the FAA's authorization. As a result of the bill Congress passed today, passengers who purchased tickets prior to July 23 and traveled between July 23 and the date of enactment of today’s legislation are not entitled to a refund of the airline ticket excise tax. Additionally, the IRS intends to provide relief for passengers and airlines with respect to ticket taxes that were not paid or collected because of the lapse.

The IRS intends to provide guidance to the airlines which will allow for an orderly restart of the collection of ticket taxes. Airlines will have from the time of enactment of the legislation through 12:01 a.m. on Monday, Aug. 8, to resume collection of the ticket taxes.

The IRS is currently reviewing other effects of the legislation and will issue future guidance.

Nine Tips for Charitable Taxpayers

If you make a donation to a charity this year, you may be able to take a deduction for it on your 2011 tax return. Here are the top nine things the IRS wants every taxpayer to know before deducting charitable donations.

MAKE SURE THE ORGANIZATION QUALIFIES Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization or check IRS Publication 78, Cumulative List of Organizations. It is available at www.IRS.gov.

YOU MUST ITEMIZE Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.

WHAT YOU CAN DEDUCT You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.

WHEN YOU RECEIVE SOMETHING IN RETURN If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.

RECORDKEEPING Keep good records of any contribution you make, regardless of the amount. For any cash contribution, you must maintain a record of the contribution, such as a cancelled check, bank or credit card statement, payroll deduction record or a written statement from the charity containing the date and amount of the contribution and the name of the organization.

PLEDGES AND PAYMENTS Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, you can only deduct $200.

DONATIONS MADE NEAR THE END OF THE YEAR Include credit card charges and payments by check in the year you give them to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

LARGE DONATIONS For any contribution of $250 or more, you need more than a bank record. You must have a written acknowledgment from the organization. It must include the amount of cash and say whether the organization provided any goods or services in exchange for the gift. If you donated property, the acknowledgment must include a description of the items and a good faith estimate of its value. For items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attach the form to your return. If you claim a deduction for a contribution of noncash property worth more than $5,000, you generally must obtain an appraisal and complete Section B of Form 8283 with your return.

TAX EXEMPTION REVOKED Approximately 275,000 organizations automatically lost their tax-exempt status recently because they did not file required annual reports for three consecutive years, as required by law. Donations made prior to an organization’s automatic revocation remain tax-deductible. Going forward, however, organizations that are on the auto-revocation list that do not receive reinstatement are no longer eligible to receive tax-deductible contributions.

For the list of organizations whose tax-exempt status was revoked, visit www.IRS.gov. For general information see IRS Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property. These publications are available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Ten Tips for Taxpayers Who Owe Money to the IRS

While the majority of Americans get a tax refund from the Internal Revenue Service each year, there are many taxpayers who owe and some who can’t pay the tax all at once.   The IRS has a number of ways for people to pay their tax bill.

The IRS has announced an effort to help struggling taxpayers get a fresh start with their tax liabilities. The goal of this effort is to help individuals and small business meet their tax obligations, without adding unnecessary burden.  Specifically, the IRS has announced new policies and programs to help taxpayers pay back taxes and avoid tax liens.

Here are ten tips for taxpayers who owe money to the IRS.

TAX BILL PAYMENTS If you get a bill this summer for late taxes, you are expected to promptly pay the tax owed including any penalties and interest.  If you are unable to pay the amount due, it is often in your best interest to get a loan to pay the bill in full rather than to make installment payments to the IRS.

ADDITIONAL TIME TO PAY Based on your circumstances, you may be granted a short additional time to pay your tax in full. A brief additional amount of time to pay can be requested through the Online Payment Agreement application at www.irs.gov or by calling 800-829-1040.

CREDIT CARD PAYMENTS You can pay your bill with a credit card. The interest rate on a credit card may be lower than the combination of interest and penalties imposed by the Internal Revenue Code. To pay by credit card contact one of the following processing companies: Link2Gov at 888-PAY-1040 (or www.pay1040.com), RBS WorldPay, Inc. at 888-9PAY-TAX (or www.payUSAtax.com), or Official Payments Corporation at 888-UPAY-TAX (or www.officialpayments.com/fed).  

ELECTRONIC FUNDS TRANSFER You can pay the balance by electronic funds transfer, check, money order, cashier’s check or cash.  To pay using electronic funds transfer, use the Electronic Federal Tax Payment System by either calling 800-555-4477 or using the online access at www.eftps.gov.

INSTALLMENT AGREEMENT You may request an installment agreement if you cannot pay the liability in full. This is an agreement between you and the IRS to pay the amount due in monthly installment payments. You must first file all required returns and be current with estimated tax payments.

ONLINE PAYMENTS AGREEMENT If you owe $25,000 or less in combined tax, penalties and interest, you can request an installment agreement using the Online Payment Agreement application at www.irs.gov.

FORM 9465 You can complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill in the envelope you received from the IRS.  The IRS will inform you (usually within 30 days) whether your request is approved, denied, or if additional information is needed.

COLLECTION INFORMATION STATEMENT You may still qualify for an installment agreement if you owe more than $25,000, but you are required to complete a Form 433F, Collection Information Statement, before the IRS will consider an installment agreement.

USER FEES If an installment agreement is approved, a one-time user fee will be charged.  The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account.  For eligible individuals with lower incomes, the fee can be reduced to $43.

CHECK WITHHOLDING Taxpayers who have a balance due may want to consider changing their W-4, Employee’s Withholding Allowance Certificate, with their employer. A withholding calculator at www.irs.gov can help taxpayers determine the amount that should be withheld.

For more information about the Fresh Start initiative, installment agreements and other payment options visit www.irs.gov.  IRS Publications 594, The IRS Collection Process, and 966, Electronic Choices to Pay All Your Federal Taxes, also provide additional information regarding your payment options. These publications and Form 9465 can be obtained from www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

8 Benefits of Outsourcing Payroll

In our experience, small- and medium-sized businesses outsource payroll most often for these important reasons:

1. Avoid IRS Penalties
According to the IRS, 40 percent of small businesses pay an average penalty of $845 per year for late or incorrect filings and payments. Most national payroll services provide a tax guarantee, ensuring that customers will incur no penalties because the providers take responsibility for penalties when they do occur. In many instances, this cost-saving immediately justifies outsourcing payroll.

2. Reduce Costs
The direct costs of processing payroll can be greatly reduced by working with a payroll provider. Our research indicates that a small business with 10 employees will typically spend $2,600 per year in direct labor costs associated with payroll.

3. Alleviate Pain
Manual payroll is a headache in the best case and a nightmare in the worst case. Business owners who outsource payroll eliminate a tiresome source of personal pain.

4. Offer Direct Deposit
Providing direct deposit is difficult if a company doesn't use an outside payroll service. Increasingly, small businesses recognize that employees want direct deposit. Not having to make a trip to the bank is an important convenience for them. More importantly for business owners, direct deposit eliminates time-consuming and error-prone paper handling and the need to reconcile individual payroll checks every month.

5. Free Up Free Time
Payroll processing by hand is a time-consuming process. Outsourcing payroll can free up staff time to pursue more important value-added and revenue-generating activities. Inc. magazine recently identified payroll as the #1 task for small business to outsource, along with most accounting tasks.

6. Avoid Technology Headaches
A constant question for small business owners is whether they have the latest version of their payroll software and the most recent tax tables installed on their computer. Using the wrong tax tables can result in stiff penalties. Outsourcing payroll removes those headaches and keeps payroll running smoothly.

7. Leverage Outside Payroll Expertise
Most business owners and controllers don't have time to keep up with constantly changing regulations, withholding rates, and government forms. By outsourcing payroll, a small business can take advantage of expertise that was previously available only to big companies.

8. Avoid Payroll Knowledge Walking Out the Door
If your bookkeeper or controller gets a new job, they will walk out the door with their knowledge of the payroll process and how you do it. Using an outside service eliminates that business risk.

Does the IRS Have Money Waiting For You?

If you earned income in the last few years but you didn’t file a tax return because your wages were below the filing requirement, the Internal Revenue Service may have some money for you. The IRS also has millions of dollars in checks that are returned each year as undeliverable.

Here’s what you need to know about these two types of “missing money” and how to claim it:

Unclaimed Refunds

Some people earn income and may have taxes withheld from their wages but are not required to file a tax return because they have too little income. In this case, you can claim a refund for the tax that was withheld from your pay. Other workers may not have had any tax withheld but would be eligible for the refundable Earned Income Tax Credit, but must file a return to claim it.

To collect this money a return must be filed with the IRS no later than three years from the due date of the return.
If no return is filed to claim the refund within three years, the money becomes the property of the U.S. Treasury.  
There is no penalty assessed by the IRS for filing a late return qualifying for a refund.
Current and prior year tax forms and instructions are available on the Forms and Publications page of www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Information about the Earned Income Tax Credit and how to claim it is also available on www.irs.gov.

Undeliverable Refunds

Were you expecting a refund check but didn't get it?

Refund checks are mailed to your last known address. Checks are returned to the IRS if you move without notifying the IRS or the U.S. Postal Service.
You may be able to update your address with the IRS on the “Where’s My Refund?” feature available on IRS.gov. You will be prompted to provide an updated address if there is an undeliverable check outstanding within the last 12 months.
You can also ensure the IRS has your correct address by filing Form 8822, Change of Address, which is available on www.irs.gov or can be ordered by calling 800-TAX-FORM (800-829-3676).
If you do not have access to the Internet and think you may be missing a refund, you should first check your records or contact your tax preparer. If your refund information appears correct, call the IRS toll-free assistance line at 800-829-1040 to check the status of your refund and confirm your address.

Two-Year Limit No Longer Applies to Many Innocent Spouse Requests

The Internal Revenue Service announced this week that it will extend help to more innocent spouses by eliminating the two-year time limit that now applies to certain relief requests.

"In recent months, it became clear to me that we need to make significant changes involving innocent spouse relief," said IRS Commissioner Doug Shulman. "This change is a dramatic step to improve our process to make it fairer for an important group of taxpayers. We know these are difficult situations for people to face, and today’s change will help innocent spouses victimized in the past, present and the future."

The IRS launched a thorough review of the equitable relief provisions of the innocent spouse program earlier this year. Policy and program changes with respect to that review will become fully operational in the fall and additional guidance will be forthcoming. However, with respect to expanding the availability of equitable relief:

    The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.

    A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in suspense will be automatically afforded the new rule and should not reapply.

    The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.

The change to the two-year limit is effective immediately, and details are in Notice 2011-70, posted today on IRS.gov.

Existing regulations, adopted in 2002, require that innocent spouse requests seeking equitable relief be filed within two years after the IRS first takes collection action against the requesting spouse. The time limit, adopted after a public hearing and public comment, was designed to encourage prompt resolution while evidence remained available. The IRS plans to issue regulations formally removing this time limit.

By law, the two-year election period for seeking innocent spouse relief under the other provisions of section 6015 of the Internal Revenue Code, continues to apply. The normal refund statute of limitations also continues to apply to tax years covered by any innocent spouse request.

Available only to someone who files a joint return, innocent spouse relief is designed to help a taxpayer who did not know and did not have reason to know that his or her spouse understated or underpaid an income tax liability. Publication 971, Innocent Spouse Relief, has more information about the program.

IRS Changes Can Help Business Struggling With Taxes

Is your business struggling with unpaid taxes? You’re not alone, and since the recession began, the IRS has taken steps to help individuals and businesses that owe taxes get a fresh start with their tax liabilities.

This year the Fresh Start program made several changes to IRS collection practices to help taxpayers, including:

1. Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens. A federal tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an unpaid tax debt.This includes property owned at the time the notice of lien is filed as well as any property purchased after that. Since a lien can hurt a taxpayer or business’s credit rating, it’s crucial to pay taxes as quickly as possible to have the lien removed.

Currently, liens are automatically filed at certain dollar levels for people with past-due balances. The IRS will significantly increase the dollar thresholds at which liens are generally filed. The new dollar amount is tied to inflationary changes since the number was last revised. The IRS plans to review the results of the lien threshold change early next year.

2. Making it easier for taxpayers to have liens withdrawn after paying a tax bill. Liens will now be withdrawn once taxes are paid in full, if the taxpayer requests it. The IRS has also streamlined its internal procedures to speed the lien withdrawal process, and will withdraw liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.

3. Creating easier access to Installment Agreements for more struggling small businesses. The IRS has made streamlined Installment Agreements available to more small businesses by raising the dollar limit so that additional small businesses can participate. Formerly, only small businesses with under $10,000 in liabilities could participate; the new program raises the limit so small businesses with $25,000 or less in unpaid tax can participate. Small businesses now have 24 months to pay.

In addition, streamlined Installment Agreements are now available for small businesses that file either as an individual or as a business. Small businesses with unpaid taxes of more than $25,000 will qualify for the streamlined Installment Agreement once they reduce the balance to $25,000 or less. Small businesses must enroll in a Direct Debit Installment Agreement to participate.

4. Expanding the streamlined Offer in Compromise program to cover more taxpayers. An OIC is an agreement between a taxpayer and the IRS to settle the taxpayer’s tax liabilities for less than the full amount owed. In most cases, an offer will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. The OIC program has been expanded to allow taxpayers with annual incomes up to $100,000 to participate. Participants must have tax liability of less than $50,000 (an increase from the former limit of $25,000 or less.)

Will any of these changes help your business? You can find out more about the changes and get necessary forms at the IRS website.

By Maria Valdez Haubrich at NetworkSolutions GrowSmartBiz.

Interest Checking Is Now Available to Small Businesses

Thursday, July 21, 2011 marks the one-year anniversary of the date the Dodd-Frank Wall Street Reform and Consumer Protection Act became law, and it is also the day many of the law’s provisions take effect. Some of those measures are controversial, like new enforcement powers for the Consumer Financial Protection Bureau and new limits on the fees banks can charge merchants for debit card transactions. Others have almost entirely escaped noticed. Among the little-discussed changes: a Depression-era ban on paying interest on business checking accounts has finally been retired. And big banks are quickly — and for the most part quietly — adapting.

Large companies with big deposits have long been able to get around the prohibition by using so-called sweep accounts, which invest deposits in money market accounts each night and then return the funds the next day. Sweep accounts, however, are an inefficient and expensive way to earn interest. Effective Thursday, with the repeal of what was once — long ago — called Regulation Q, several large banks will begin to offer interest-bearing checking accounts to all business customers. The banks include Capital One, Citibank, TD Bank, and Wells Fargo. Regions Bank plans to begin offering interest accounts to business customers on Aug. 1, and a spokeswoman for Fifth Third Bank, based in Cincinnati, said interest-earning checking for companies “is in the works.”

The two largest American banks, Bank of America and Chase, had not made a decision as of Wednesday, according to spokespeople for each. “We’re currently reviewing different options but have no immediate plans to alter any existing products or add a new one,” said Jefferson George, a spokesman for Bank of America, in an e-mail. (Mr. George added that Bank of America, like many banks, offers interest accounts to sole proprietors, nonprofits and government entities.)

Several other large banks have not responded to requests for information, and that seems to be in keeping with a widespread silence on the topic. One bank spokesperson — who insisted on anonymity — said that the change was trivial: “Interest-bearing checking is not a new thing. It’s available to more businesses now, but a large portion of our customer base already had access to it.”

Moreover, according to this spokesperson, interest isn’t very important to small-business owners. “They’re probably more interested in having their fees waived,” the spokesperson said. “In today’s environment, an account with $10,000 is likely to earn between $3 and $8 a year. In comparison, average monthly service fees industry-wide are $10 to $20 a month. By having them waived, you can save $120 a year.”

The information found here is from the article, "Shhh! Interest Checking Is Now Available to Small Businesses' by Robb Mandelbaum published by the New York Times.

Canceled Debt – Is it Taxable or Not?

In general, if you are liable for a debt that is canceled, forgiven, or discharged, you must include the canceled amount in gross income unless you meet an exclusion or exception. However, canceled or forgiven debt is not considered income if it is intended as a gift or bequest.

A debt includes any indebtedness for which you are personally liable or for which you are liable only to the extent of the property securing the debt. Cancellation of all or part of a debt that is secured by property may occur because of a foreclosure, a repossession, a voluntary return of the property to the lender, abandonment of the property, or a principal residence loan modification. You must report any taxable amount of a debt that is canceled, as ordinary income from the cancellation of debt, on Form 1040 or Form 1040NR and associated sub-schedules, as advised in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals).

Caution: If your debt is secured by property and that property is taken by the lender in full or partial satisfaction of your debt, you will be treated as having sold that property and may have a reportable gain or loss. The gain or loss on such a deemed sale of your property is a separate issue from whether any canceled debt also associated with that same property is includable in gross income. See IRS Publication 544, Sales and Other Dispositions of Assets, for detailed information on reporting gain or loss from repossession, foreclosure or abandonment of property.

If a federal government agency or an applicable financial entity cancels or forgives a debt you owe of $600 or more, you should receive a Form 1099-C (PDF), Cancellation of Debt, showing amounts and other information relating to the cancellation. The amount of canceled debt is shown in Box 2 of the form. Taxpayers may also receive a Form 1099-A (PDF), Acquisition or Abandonment of Secured Property.

Canceled Debts that meet the requirements for any of the following exceptions or exclusions are not taxable.

Canceled Debt that Qualifies for Exception to Inclusion in Gross Income:

    Amounts specifically excluded from income by law such as gifts or bequests
    Cancellation of certain qualified student loans
    Canceled debt that if paid by a cash basis taxpayer is otherwise deductible
    A qualified purchase price reduction given by a seller

Canceled Debt that Qualifies for Exclusion from Gross Income:

    Cancellation of qualified principal residence indebtedness
    Debt canceled in a Title 11 bankruptcy case
    Debt canceled due to insolvency
    Cancellation of qualified farm indebtedness
    Cancellation of qualified real property business indebtedness

The exclusion for "qualified principal residence indebtedness," provides canceled debt tax relief for many American home owners involved in the mortgage foreclosure crisis currently affecting much of the country. The exclusion allows taxpayers to exclude up to $2,000,000 ($1,000,000 if married filing separately) of "qualified principal residence indebtedness".

Generally, if you exclude canceled debt from income under one of the exclusions listed above, you must also reduce your tax attributes (certain credits, losses, and basis of assets) by the amount excluded. You must file Form 982 (PDF), Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the exclusion and the corresponding reduction of certain tax attributes.

Refer to Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals), for more detailed information regarding taxability of canceled debt, how to report it, and related exceptions and exclusions. Additional information can also be found in Publication 525, Taxable and Nontaxable Income.

What Some Banks Don’t Want You to Know

New York Times columist Jay Goltz went to the source to find out what bankers are often reluctant to tell small-business owners: precisely what they expect from borrowers. Goltz, author of the column 'You're the Boss', asked his own banker Matt Sloan from American Chartered Bank to get small business owners 'in the know'. Here are Sloan's thoughts:

Deciding whether to provide credit to a business can definitely be as much art as science, but there are some material factors to consider:

1. How much equity or net worth does the business have on its balance sheet? This is extremely important as we need to know what happens if the company has a rainy day or if our economy goes through another recession. Does the business have enough capital to survive if it loses a major client? On the same note, what is the overall leverage (debt to equity) of the company? Less than four to one? That’s fair. Three to one? That’s good. Two to one? Excellent. If a business makes $100,000 and the owners pull out $200,000 in distributions, then the company actually lost $100,000 from our perspective. (Believe me, we see this happen.)

2. What type of collateral is supporting the loan? I don’t see many banks providing unsecured loans in today’s climate so there have to be enough “eligible” receivables (90 days and under), “clean” inventory (sellable), equipment and/or recently appraised real estate to cover the loan amount.

3. Cash Flow. The years 2008 and 2009 were rough for many businesses, so if you were able to survive and rebound in 2010, more power to you. We analyze the past three years to understand trends, but we completely understand how difficult the economy has been. So, if a company has turned the corner and can show that its cash flow can support its debt payments at a multiple of 1.2 or 1.3 (meaning that it is taking in at least 20 percent more than the debt payment), the it is a good banking candidate.

4. Character. Do I want a new client who doesn’t return phone calls and doesn’t treat me or my team with respect? No. I want to work with solid, ethical people who are looking to build long lasting relationships. End of story. It’s better for both sides.

5. Conditions are a tricky topic because a good company can perform well in a bad economy (and vice versa). So, let’s leave that one alone.

I hope this clears up some of the confusion surrounding the crazy banking environment we live in.

In an addendum from Goltz himself,

"I will add one more thing. I found American Chartered Bank through my accountant. He knows which banks are lending, what they are like to work with and what they are looking for. And he has a relationship with the banks that the banks don’t want to mess up. If your accountant can’t help you, and you need to borrow money, it might be time to consider finding a new accountant. If you are looking to borrow money, you probably need an accountant who does more than your tax return."

Information in this article comes from 'You're the Boss: The Art of Running a Small Business' published in the New York Times.

How To Dig Out After A Long Weekend

Ah, the joy of long holiday weekends. They re-energize, revitalize and send you back to work... feeling you like you've slept in late and got a term paper due at noon. The reasons for this are unclear--vacations are planned for, coworkers notified to pick up the slack, email generally avoided--but just one extra day off can throw your entire week out of sync.

There are ways to enjoy the long weekends without paying for it on the other end. Here are a few tips to help you avoid emergency maneuvers on your way back to the office.

Set Up a Calm, Clean Space for Your Landing

You'll have plenty of chances to freak out about returning to work--11 p.m. the night before is a generally accepted starting point. Returning to a messy desk, a computer desktop full of unsorted files, and a few coffee mugs with brews of unknown vintage will reinforce the feeling that everything's gone South while you were sleeping in. So put in some dedicated custodial time before you split, or early when you return.

J.D. Roth, the productive personal finance blogger behind Get Rich Slowly and Your Money: The Missing Manual admits that he's a slob by nature with a messy office--which works fine on most days. But if Roth has a vacation or day off coming up, he carves out time before departing to pick up diet soda bottles and tidy up the paper stacks. "The top thing I can do to improve my productivity ... is to clean my office before I leave. I'm not kidding," Roth writes. "This gives me a huge boost when I return."

Prune Your Task Lists with New-Found Perspective

Your to-do list is supposed to be a practical, honest list of things you can get done in methodical fashion. Across long days and multiple projects, that list tends to get filled with things you wish you could do, things that are too big and vague to do simply ("Get a grip on expenses"), or things that aren't that important. Now that you've spent a good bit away from your desk, you have tangible proof that those tasks you're always putting off aren't holding up your ceiling. With that perspective, go ahead and clean out your to-do list.

Don't Panic, Stick to Your Routine (If You Have a Good One)

Mark Forster, author of Do It Tomorrow, might disagree with that previous advice about to-do lists--his productivity system leans more toward routines, flows, and being conscious of what you're doing. But Forster understands the nature of long weekend panic. When a heap of work is dropped on you, the part of your thinking that Forster terms the "Reactive Mind" wants to panic, to enter triage mode, to reach out and stab at a few seemingly Top Priority items and leave the rest.

That's a surefire ticket to email backlog, incomplete items, and no kind of output that will impress the bosses. Instead, take the time to fully address yourself to each of the things that needs doing. That calm starting point also forces you to figure out whether inbox cleaning, for example, is more important than touching base with an important client or vendor. Just as importantly, don't give up on the necessary breaks and daily rituals that balance out your other days. (Get a better sense of Forster's take on long weekends in a free first chapter.)

Nobody knows what awaits you at work after an extra day or two off, but that's also the good news. Give yourself a clean, calm space to work in, leave yourself the time you really need to do things right, and commit yourself to enjoying your extended weekend. If it helps, picture what your impatient managers and correspondents looked like in Bermuda shorts over the weekend when they're trying to add panic to your plan.

By Kevin Purdy @ Fast Company

How to Survive a Tax Audit

These five tips can help you minimize the stress of IRS scrutiny should your return raise a red flag.

Tax audits can be stressful and time consuming. Small-business owners, who might be navigating complex business tax rules for the first time or who work in cash businesses like restaurants where mistakes are easy to make, are especially likely to attract unwanted attention from the Internal Revenue Service.
The good news is that an audit doesn't have to be an endless, painful, invasive process, says James Guarino, a certified public accountant and a partner at Moody Famiglietti & Andronico in Tewksbury, Mass. You can even emerge without owing more money. Here are some tips for minimizing the pain of an audit.

1. Keep things in perspective.
Few audits are a line-by-line examination of a return that people imagine when they envision an IRS probe. Often there is a math error, and the supporting documents such as 1099s don't match the figures on a company's return. Addressing the IRS's concern could be as simple as supplying a missing document or fixing an incorrect 1099 and redoing the math on the tax form.

Beyond that, sometimes a single aspect of a return will raise a red flag and the IRS will ask for additional supporting material. For example, professional real-estate investors can claim losses and write-offs that casual investors might not be able to, Guarino explains. "But you have to meet certain criteria to be a professional rather than run-of-the-mill investor." So if an entrepreneur makes this claim but the investment activity doesn't fall into the range that's typical for professionals, the IRS might ask for further substantiation of that status.

2. Get help.
Larry Elkin, a certified public accountant in Scarsdale, N.Y., says that when he was audited, he never dealt with the IRS directly. "Hiring an attorney or CPA takes the emotion out of it," says Elkin, who is president of Palisades Hudson Financial Group, a financial planning firm. And experienced tax lawyers and accountants can recognize when an issue isn't as black-and-white as an agent might assert. "There can be a lot of shades of gray," Guarino says. "Your audit could relate to a deduction that's controversial, where the IRS always tries to take an aggressive stance but where every time it's gone to court, it's lost."
Elkin concurs. "The audit agent will write up points" that allege a client owes money, he says. "We often argue and win because they don't want taxpayers to appeal the levy in court and win."

3. Provide exactly what the agent asks for.
Resist the urge to volunteer information. It's ideal to provide no less, but no more than the IRS requests. The best way to get an IRS audit over with quickly is to keep it confined to the single issue initially raised.
If you talk directly to the audit agents, Guarino says, answer with direct speech: "Yes; no; I'll look into it," he says. "Any tidbit of information that you offer could bring things to the auditor's attention that he might not have thought of otherwise. That could open a new can of worms."
This is another reason in favor of having someone else represent you in an audit, Elkin says. "If I had dealt directly with the agent, I might have invited an open-ended fishing expedition. The other way the agent had to decide what he wanted to know. He asked and we answered."

4. Don't assume the IRS is right.
Agents can make mathematical errors or overlook important documents as easily as a taxpayer can. And when laws or financial values are open to interpretation, the auditor will take the stance that benefits the IRS, the experts say. That doesn't mean you can't successfully argue the opposite point of view. For example, if you donate a piece of art to a nonprofit, "no one is going to dispute that it's deductible, but you can disagree over the size of the deduction," Elkin says.
In that case, it's up to you as a business owner to provide documents, such as appraisals or auction prices for similar items, to substantiate your claimed deduction. If you can do so, the agent might have to accept it or agree to a compromise number.

5. Decline requests to extend the IRS's deadline.
Because of a backlog of cases, the IRS routinely asks owners of companies that are audit targets to waive the statute of limitations usually restricting probes to the three years previous. "You should say no," Elkin says. "Taxpayers have a few months to get their taxes together and the government has three years to audit them," he says. "That's enough. You don't have to endlessly accommodate them."
Elkin cautions that the written request for a waiver might not read like a request and it might seem as if you have no choice but to agree. Rather than be intimidated by the legalese, check with a tax adviser before responding. Sticking to a firm deadline with the IRS probably won't release you from an audit. "The agent will finish as much as possible in the time allowed," Elkin says. "If he's right, you should pay the claim; if he's not, you should dispute it."

Either way, a proper response should bring the audit to a prompt close so that you can move on—and start getting ready for the next tax season.

An article from Entrpreneur.com by Eileen P. Gunn

When to Hire a Bookkeeper or Accountant

When QuickBooks takes you only so far, it's time to bring in a financial pro.

Entrepreneurs thrive on a DIY mentality: Do everything you can yourself and don't pay for anything new until you have absolutely have to. It's especially difficult to justify hiring financial help like a bookkeeper.

With user-friendly software such as QuickBooks available, many business owners feel they should be able to do keep their records on their own, even as they wrestle with finding the time and wonder if they're doing things correctly.

Deciding about "hiring a bookkeeper is something I struggle with all the time," says Randy Mitchelson, owner of National Web Leads, an Internet marketing company in Estero, Fla. While he finds basic accounting easy to do, it takes him away from working on his business. Meanwhile, his accounting and tax planning have become only more complicated in the six years since he founded his business.
Entrepreneurs who hire accounting help usually discover they weren't doing nearly as well on their own as they thought they were.

Zalmi Duchman, chief executive of The Fresh Diet, a meal-delivery company based in Miami, lasted five years without a bookkeeper then hired one three months ago. The new employee cleaned up records that incorrectly mingled expenses and assets, reviewed employee purchases for duplications, and took over the mundane but critical task of paying bills. Duchman estimates his company is saving $500 to $1,000 in late fees every quarter. "I definitely have been able to make better and more educated decisions," he says.

So what are a small-business owner's options for professional help with financial tasks? Here is a primer:

Do I Need a Bookkeeper or an Accountant?

Actually it's a trick question. You may need both.

Aaron Sylvan, a serial entrepreneur who lives in New York, compares the situation to needing to hire both a carpenter and an architect when building a house.

An accountant can analyze the big picture of your financial situation and offer strategic advice. He or she produces key financial documents, such as a profit-and-loss statement, if needed, and files a company's taxes.

After tax season is over, an accountant can also act as an outsourced chief financial officer, advising an entrepreneur on financial strategies, such as whether to secure a line of credit against receivables when introducing new products.

In contrast, a bookkeeper does the day-to-day hands-on tasks: making sure new employees file all the right paperwork for the company's payroll, submitting invoices (promptly) and following up on them, and paying the bills. The bookkeeper also tracks company expenses and can assure that every cost has been entered -- and recorded correctly -- into software like QuickBooks so that the business is ready for tax time along with filing any other reporting to, say, creditors or investors.

"I don't keep receipts; they're a pain," says Sylvan, who runs Sylvan Social Technology, an ecommerce-services company. "Every month I get a bank statement with a gazillion transactions," such as taxi rides, meals, conferences and other expenses he has placed on his company's debit card.

His bookkeeper spends a few hours a week sorting it all out. As a result, Sylvan has a better idea about how his expenditures stack up against his budget. He knows he won't bill clients incorrectly or miss important payments.

"Knowledge is power," even when it comes to the small details, Sylvan says. "If you don't have a bookkeeper, you're probably not being as strategic as you could be in how you spend your money."

When to Bring in a Bookkeeper

In his running a half-dozen businesses the past 15 years, Sylvan has typically hired a bookkeeper for a few hours a week within a few months after starting a new venture. For the first six to nine months, he's usually too busy to focus much on recordkeeping, then "things begin to stabilize," he says. "Then you can see trends and you can start to think strategically about where your money is going and where you can save." And this is when a bookkeeper becomes valuable. Since Sylvan has fewer than a dozen employees at each new company, the bookkeeping takes about one day a month, he says.

The rates for hiring a bookkeeper on a part-time basis in the U.S. can range from $15 to $60 an hour, depending on location, the workload and whether work is done at the company's office or from home.

Sylvan typically sees his accountant once a year, at tax time. But business owners requiring capital or frequently negotiating credit with a bank are likely to contact their accountants more often.

When to Hire a Staff Accountant or Bookkeeper

Many small entrepreneurs can probably stick to outsourcing accounting or bookkeeping services for quite some time. The typical service business can often outsource its chief financial officer tasks and bookkeeping until its revenues rises well above the $1 million mark -- or until it has about 30 employees. Until then, most businesses usually don't have enough work to keep a full-timer busy every day.

It's time to hire full-time help, though, when you're calling your accountant often enough that you wish he or she were in the office all the time. Bring in a full-time bookkeeper when your part-timer is spending two or three full days in the office and still falling behind.

Most new business owners find a staffing solution somewhere along the continuum that ranges from trying to go it alone and paying for full-time help.

An article from Entrpreneur.com by Eileen P. Gunn

IRS Increases Mileage Rate to 55.5 Cents per Mile

The Internal Revenue Service announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.

The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."

While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

The new rates are contained in Announcement 2011-40 on the optional standard mileage rates.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

The IRS Goes Mobile!

Welcome to the 21st century! The Internal Revenue Service unveiled IRS2Go, its first smartphone application that lets taxpayers check on their status of their tax refund and obtain helpful tax information.

"This new smart phone app reflects our commitment to modernizing the agency and engaging taxpayers where they want when they want it," said IRS Commissioner Doug Shulman. "As technology evolves and younger taxpayers get their information in new ways, we will keep innovating to make it easy for all taxpayers to access helpful information."

The IRS2Go phone app gives people a convenient way of checking on their federal refund. It also gives people a quick way of obtaining easy-to-understand tax tips.

Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app.

"This phone app is a first step for us," Shulman said. "We will look for additional ways to expand and refine our use of smartphones and other new technologies to help meet the needs of taxpayers."

The mobile app, among a handful in the federal government, offers a number of safe and secure ways to help taxpayers. Features of the first release of the IRS2Go app include:

Get Your Refund Status

Taxpayers can check the status of their federal refund through the new phone app with a few basic pieces of information. First, taxpayers enter a Social Security number, which is masked and encrypted for security purposes. Next, taxpayers pick the filing status they used on their tax return. Finally, taxpayers enter the amount of the refund they expect from their 2010 tax return.

For people who e-file, the refund function of the phone app will work within about 72 hours after taxpayers receive an e-mail acknowledgement saying the IRS received their tax return.

For people filing paper tax returns, longer processing times mean they will need to wait three to four weeks before they can check their refund status.

About 70 percent of the 142 million individual tax returns were filed electronically last year.

Get Tax Updates

Phone app users enter their e-mail address to automatically get daily tax tips. Tax Tips are simple, straightforward tips and reminders to help with tax planning and preparation. Tax Tips are issued daily during the tax filing season and periodically during the rest of the year. The plain English updates cover topics such as free tax help, child tax credits, the Earned Income Tax Credit, education credits and other topics.

2011 Tax Season Deadline Extended to April 18

The Internal Revenue Service today opened the 2011 tax filing season by announcing that taxpayers have until April 18 to file their tax returns. The IRS reminded taxpayers impacted by recent tax law changes that using e-file is the best way to ensure accurate tax returns and get faster refunds.

Taxpayers will have until Monday, April 18 to file their 2010 tax returns and pay any tax due because Emancipation Day, a holiday observed in the District of Columbia, falls this year on Friday, April 15. By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have three e2011 Tax Season Deadline Extended to April 18The Internal Revenue Service today opened the 2011 tax filing season by announcing that taxpayers have until April 18 to file their tax returns. The IRS reminded taxpayers impacted by recent tax law changes that using e-file is the best way to ensure accurate tax returns and get faster refunds.Taxpayers will have until Monday, April 18 to file their 2010 tax returns and pay any tax due because Emancipation Day, a holiday observed in the District of Columbia, falls this year on Friday, April 15. By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have three extra days to file this year. Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns.

It’s important to note that the deadline for 1120 C & S Corporation returns and extensions remains March 15th or 2 ½ months after your corporation’s fiscal year end. xtra days to file this year. Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns.It’s important to note that the deadline for 1120 C & S Corporation returns and extensions remains March 15th or 2 ½ months after your corporation’s fiscal year end. 

Filing Delays for Many Taxpayers

While the IRS believes that tax season will start on time for the majority of taxpayers, those affected by three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns. In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid- to late February to file as well.

The start of the 2011 filing season will begin in January for the majority of taxpayers. However, December’s changes in the law mean that the IRS will need to reprogram its processing systems for three provisions that were extended in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17.

People claiming any of these three items — involving the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction as well as those taxpayers who itemize deductions on Form 1040 Schedule A — will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid- to late February.

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the late tax law changes. In the interim, people in the affected categories can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes.

Taxpayers will need to wait to file if they are within any of the following three categories:

• Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted Dec. 17, which primarily benefits people living in areas without state and local income taxes and is claimed on Schedule A, Line 5. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
• Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students — covering up to $4,000 of tuition and fees paid to a post-secondary institution — is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.
• Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.

For those falling into any of these three categories, the delay affects both paper filers and electronic filers.

Payroll Tax Cut to Boost Take-Home Pay for Most Workers

Millions of workers will see their take-home pay rise during 2011 because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides a two percentage point payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid. This reduced Social Security withholding will have no effect on the employee’s future Social Security benefits.
The new law also maintains the income-tax rates that have been in effect in recent years.

Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but not later than Jan. 31, 2011.

The IRS recognizes that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems. For that reason, the agency has asked employers to adjust their payroll systems as soon as possible, but not later than Jan. 31, 2011. For any Social Security tax over withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2011.

Employers and payroll companies will handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form.

Credit for Small Employer Health Insurance Premiums

Included in the Affordable Care Act enacted in March, the small business health care tax credit is designed to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or maintain coverage they already have. A broad range of employers meet the eligibility requirements, including religious institutions that provide coverage through denominational organizations, small employers that cover their workers through insured multiemployer health and welfare plans, and employers that subsidize their employees’ health care costs through a broad range of contribution arrangements.

In general, the credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

Small businesses can claim the credit for 2010 through 2013 and for any two years after that. For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations.

The maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.