Tax legislation

President Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011 on December 23, 2011, extending the employee-side payroll tax cut through the end of February 2012. In November, President Obama signed the 3% Withholding Repeal and Job Creation Act of 2011, which repeals three percent government withholding, enhances the Work Opportunity Tax Credit (WOTC) to cover more military veterans, expands the IRS’s continuous levy authority, and more. In October, President Obama signed the Trade Adjustment Assistance Extension Act, enhancing the health care tax credit (HCTC) for qualified individuals. You will continue to receive some payroll tax relief into early 2012.

In related news, the IRS advised employers to implement the reduced employee-side payroll tax rate as soon as possible in 2012 but no later than January 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in employees’ pay as soon as possible but no later than March 31, 2012, the IRS instructed.

Foreign accounts

The Foreign Account Tax Compliance Act (FATCA) generally requires certain U.S. taxpayers holding specified financial assets outside the United States to report them to the IRS. FATCA also requires foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The IRS posted a final version of Form 8938, Statement of Specified Foreign Financial Assets, and Instructions on its website in December.

The IRS also issued a Fact Sheet alerting dual citizenship taxpayers, as well as U.S. citizens who reside abroad, to their obligation to file U.S. income tax returns and, if appropriate, a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. The IRS described possible penalties for failure to file, and grounds for avoiding the penalties.

Mileage rates

The IRS announced in December that the business standard mileage rate for 2012 will be 55.5 cents-per-mile, which is unchanged from the second half of 2011. The standard mileage rate for medical and moving expenses will be 23 cents-per-mile, reflecting a 0.5 cents-per-mile reduction from 2011. The statutorily-determined rate for the charitable deduction remains unchanged at 14 cents-per-mile for 2012.

Capitalization of tangibles

Just before year-end 2011, the IRS issued much-anticipated revised regulations on the capitalization of tangible assets. The IRS withdrew proposed regulations issued in 2008 and issued temporary and proposed regulations. The new guidance, the IRS explained, is intended to clarify existing standards and provide certain bright-line tests for applying the standards. The text of the temporary regulations serves as the text of the proposed regulations. The temporary regulations are binding on both taxpayers and the government.

Worker classification

A new IRS program – the Voluntary Classification Settlement Program (VCSP) – will enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of audit production and a reduced penalty framework. The VCSP is open to taxpayers currently treating their workers as independent contractors or other nonemployees and that want to prospectively treat the workers as employees. Other requirements also must be satisfied. If you have questions about whether someone you hire is an independent contractor or an employee give us a call.

Inflation adjusted amounts

The IRS issued cost of living adjustments (COLAs) for various provisions in the Tax Code for 2012. Because of inflation, many provisions are adjusted upward for 2012. For example, the standard deduction for single taxpayers increases from $5,800 for tax years beginning in 2011 to $5,950 for tax years beginning in 2012, and the standard deduction for married couples filing a joint return increases from $11,600 for 2011 to $11,900 for 2012.

Social Security wage base

The Social Security Administration (SSA) announced that the maximum amount of earnings subject to Social Security will be $110,100 for 2012, up from $106,800 for 2011. SSA also reported that the so-called “nanny tax” threshold will increase to $1,800 for 2012.

Qualified plans

Many retirement plan contribution and benefit limits will increase in 2012, the IRS announced. The 2012 cost of living adjustments (COLAs) affect a variety of retirement savings vehicles, including defined contribution plans, defined benefit plans, employee stock ownership plans (ESOPs), and individual retirement arrangements (IRAs).

Decedents’ estates

The IRS released final Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, and its Instructions. Executors will use Form 8939 to make a “Section 1022 Election” to opt out of the 2010 estate tax and apply modified carryover basis.

IRS basis regs

The U.S. Supreme Court agreed to resolve the split among the federal courts of appeal over IRS regulations that impose a six-year limitations period on assessments due to overstated basis. The government asked the Supreme Court to decide whether an understatement of gross income attributable to an overstatement of basis in sold property is an omission from income that can trigger the extended six-year assessment period; and whether a final Treasury regulation, which reflects the IRS’s view that an understatement of gross income attributable to an overstatement of basis can trigger the extended six-year assessment period, is entitled to judicial deference.

“Hot Stock” rule

The IRS finalized temporary regulations, which the agency described as mitigating the impact of the “hot stock” rule on Code Sec. 355 spinoffs if the controlled corporation is a member of the distributing corporation’s separate affiliated group (SAG). The final regs generally adopt the substantive rules of the temporary regs without change.

Per diem rates

The IRS issued the simplified per diem rates that taxpayers can use to reimburse employees for expenses incurred during business travel after September 30, 2011, retaining the high-low method. The simplified high-low per diems have increased for 2012 to $242 for high-cost localities and to $163 for all other localities, an increase from $233 and $160, respectively, for 2011. The IRS also announced it will not discontinue use of the “high-low” method for substantiating travel expenses.

Whistleblowers

A whistleblower who reported her employer’s significant tax underpayment to the IRS would be entitled to anonymity, the Tax Court held in December. However, the court found the whistleblower was not entitled to an award because the IRS had been unable to collect any additional tax from the employer.

IRS operations

The Treasury Inspector General for Tax Administration (TIGTA) highlighted some of the management and performance challenges confronting the IRS for fiscal year (FY) 2012 in November. According to TIGTA, the challenges include: keeping taxpayer data secure; tax compliance initiatives; modernization; implementing major tax law changes; fraudulent claims and improper payments; providing quality taxpayer service operations; human capital; globalization; taxpayer protection and rights; and achieving program efficiencies and cost savings.

Identity theft

A top IRS official told Congress that the IRS intends to take additional measures to combat identity theft during the 2012 filing season. In 2011, the IRS began issuing Identity Protection Personal Identification Numbers (IP PINs) to victims of identity theft under a pilot program The IRS intends to expand the IP PIN program.

Ponzi schemes

The IRS modified guidance issued in 2009 that allows investors to take losses in certain Ponzi schemes. The new guidance, the IRS explained, ensures that investors will still be able to deduct their losses if the lead figure in the Ponzi scheme has died. Hopefully this doesn’t apply to you.

 Whew! Quite a list but it’s important to keep track of the changes coming from Washington.  As always,pleae contact my office if you want to schedule a tax strategy meeting to take advantage of the many tax saving opportunities in the tax code.

Mike McCormick, Managing Partner of McCormick Braun Friman, LLC, can be reached at 312-327-3402 or visit our Tax Center at www.mbflegal.com.

You are required to file a federal income tax return if your income is above a certain level, which varies depending on your filing status, age and the type of income you receive. However, some people should file even if they aren’t required to because they may get a refund if they had taxes withheld or they may qualify for refundable credits.

To find out if you need to file, you can contact our office and talk to one of our tax paralegals or check the Individuals section of the IRS website at www.irs.gov. As a general rule single taxpayers with income over $9,500 will need to file a return. Married couples must file if their incomes exceed $19,000.

Even if you don’t have to file for 2011, here are six reasons why you may want to:

1. Federal Income Tax Withheld You should file to get money back if your employer withheld federal income tax from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.

2. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund. To get the credit you must file a return and claim it.

3. Additional Child Tax Credit This refundable credit may be available if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

4. American Opportunity Credit Students in their first four years of postsecondary education may qualify for as much as $2,500 through this credit. Forty percent of the credit is refundable so even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student.

5. Adoption Credit You may be able to claim a refundable tax credit for qualified expenses you paid to adopt an eligible child.

6. Health Coverage Tax Credit Certain individuals who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a 2011 Health Coverage Tax Credit.

Eligible individuals can claim a significant portion of their payments made for qualified health insurance premiums.

As you can see, even if you didn’t make much money in 2011 you may be entitled to money back from the IRS even if you didn’t pay much into the system by virtue of your withholding. .For more information about filing requirements and your eligibility to receive tax credits, please contact our office.

Mike McCormick, Managing Partner of McCormick Braun Friman, LLC, can be reached at 312-327-3402 or visit our Tax Center at www.mbflegal.com.

If you are anything like me, you stay up at night worrying about college saving. I have 5 children and I can definitely use any tax benefits I can to get that clan through college. If you have a family with young children, you should also consider the cost of higher education well in advance. Two educational savings vehicles allow individuals to save for education on a tax-favored basis: a qualified tuition program and a Coverdell education savings account. Also, you may be able to exclude from income a limited amount of bond interest received from qualified U.S. savings bonds in the year you pay higher education expenses. Parents may also use funds from an individual retirement account or a traditional form of savings to pay tuition costs. Generally, the payment of higher education costs is supplemented with scholarships, loans and grants. However, having a viable plan as early as possible in a child’s life will make maximum use of a family’s financial resources and may provide some tax benefit.

Section 529 plans. The Tax Code allows states and some educational institutions to offer so-called “529″ plans (known for the section of the Tax Code that governs them). They are also sometimes called qualified tuition programs (QTPs). They allow you to either prepay or contribute to an account for paying a student’s post-secondary education expenses. An eligible educational institution generally includes colleges, universities, vocational schools or other post-secondary educational institutions. In addition, distributions from state programs, even to the extent of earnings, are now entirely tax-free to the extent used for qualified higher education expenses. This tax-free treatment also has been available for distributions from private college and university programs. Moreover, if you live in Illinois and contribute to Illinois’ “Bright Start” program you may be entitled to a state income tax deduction.

Coverdell education savings accounts. Coverdell education savings accounts (also sometimes called education IRAs) are similar to IRAs. You can save today for future educational expenses, not just higher educational expenses. Funds in a Coverdell ESA can also be used for K-12 and related expenses. The maximum annual Coverdell ESA contribution is $2,000 per beneficiary. Contributions are not deductible by the donor and distributions are not included in the beneficiary’s income as long as they are used to pay for qualified education expenses. Earnings accumulate tax-free. Contributions generally must stop when the beneficiary turns age 18, except for individuals with special needs. Parents can maximize benefits, however, by transferring older siblings’ accounts for use by a younger brother, sister or first cousin, thereby maximizing the tax-free growth period. Excess contributions are subject to an excise tax.

Although the amounts of adjusted gross income allowed for a contributor to a Coverdell ESA are subject to phase-out, the limits are generous. The annual contribution starts to phase out for married couples filing jointly with modified AGI at or above $190,000 and less than $220,000 and at or above $95,000 and less than $110,000 for single individuals.

Undoubtedly, some of these provisions will be more important to you than others, depending upon your personal circumstances. If you would like to explore how these opportunities can work for you and have us fully evaluate your situation, please do not hesitate to call to schedule an appointment. Now get some sleep!

As the year comes to a close I have been writing about some good tax tips that you can implement before year-end to save money at tax time. Now may also be a good time to evaluate the expenses you incur as an employee in connection with your work. While your employer may be reimbursing you for some of these expenses, there may be others for which you are bearing the cost yet not utilizing the tax benefit. Through proper substantiation, it is possible that you may be able to obtain greater reimbursement from your employer. Alternatively, you may be entitled to deduct such expenses as miscellaneous itemized deductions.  

In order to be reimbursed and/or deducted, trade or business expenses must be ordinary, necessary, and reasonable. They also must be properly substantiated. Examples of qualifying expenses include: 

1. Travel, transportation, meal, or entertainment expenses

2. Safety equipment, small tools, or supplies

3. Uniforms required by your employer that are not suitable for everyday wear

4. Required protective clothing

5. Dues to professional organizations

6. Subscriptions to professional journals

7. Certain job hunting expenses

8. Certain expenses for the business use of your home

9. Computer costs

10. Work-related educational expenses  

You may also benefit from a review of the business expenses related to the use of your home. If you qualify for the home office deduction, you may be able to deduct part of your home’s normal operating expenses, such as utilities and insurance. The tax-savings opportunities available to you are dependent not only on the type of work you do at home, but where in your home you perform it. 

The rules for deducting these expenses, as well as substantiating your deduction, vary according to the type of expense involved. It is important to retain all records and receipts that document the time, place, and business purpose of each expense. If you would like to discuss the possibility of writing off unreimbursed business expenses, give me a call to schedule an appointment

 This is a great time to maximize tax planning with year-end adjustments. It is also a great time to strategize and coincidentally we are having a discount on tax strategy meetings to make sure your 2011 return is tuned up and you are paying the least amount of tax. Too many taxpayers miss deductions that are legally allowed because they don’t plan properly. Give my office a call to schedule a meeting at this discounted rate.

Ok so today I want to discuss an issue that has come up a lot in my practice of late….new job searches and the moving expense deduction. Individual taxpayers seeking new jobs may incur a variety of expenses, including costs directly associated with moving to a new job location or those specifically related to the job search. Many of these expenses are deductible, but the rules are strict, and expenses must be carefully documented and substantiated. You may be able to take advantage of these deductions, if you plan carefully. Any moving expenses you may incur, including expenses of traveling to the new location and transporting household goods and personal effects, are deductible so long as you meet certain requirements relating to when you begin work at the new position and how far the new job is from the old job and your old residence. These expenses are deductible even if you are seeking employment for the first time or in a completely new field. Also, qualified moving expenses reimbursed or paid by your employer are considered nontaxable fringe benefits. 

You also may be able to deduct the expenses you incur in searching for a new job, including the costs of a head hunter or employment service, and the expense of preparing your resume. These expenses are deductible so long as the job being sought is in the same line of work as the old job, even if you are unemployed at the time of the job search. Further, the job search does not have to be successful in order to qualify for the deduction. However, job hunting expenses for a first job, or related to changing to a new career, are not deductible. 

Although these are just a few examples, there are many more tax issues that you should consider. It can be a great way to get money back at tax time for expenses incurred in your job search.

So this week’s tip focuses on year-end planning for taking advantage of tax deductions. This is a great time to meet with a tax professional to tweak your tax strategy. Successful tax planning includes a review of your available deductions and the impact of your filing status on your option to itemize. It is important that all of the technical requirements for your deductions be met. In addition, certain items are deductible only to the extent they exceed a percentage threshold. By reducing your adjusted gross income, you increase the amount of itemized deductions you can claim because the floor limitation amounts are reduced accordingly.  

A strategy commonly used in year-end individual tax planning is to determine the best timing for claiming itemized deductions. Generally, it is beneficial for taxpayers to defer income and accelerate expenses. This strategy may enable you to itemize your deductions if you claimed the standard deduction in the past. This year some certainty for planning purposes is provided due to the extension of the reduced individual income tax rates through 2012 by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Tax Relief Act of 2010). 

In addition to the reduced tax rates, the Tax Relief Act of 2010 also extended numerous other tax benefits, including:

1. Marriage penalty relief

2. Repeal of the itemized deduction and personal exemption phase outs

3. Itemized deduction for state and local general sales taxes in lieu of state and local income taxes

4. Mortgage insurance premium deduction

5. Above-the-line deduction for certain out-of-pocket classroom expenses

6. Above-the-line higher education tuition deduction and other education-related incentives

7. Alternative minimum tax (AMT) patch

8. Nonrefundable tax credit offset of entire regular and AMT tax liability

9. Tax-free IRA distributions to charity. 

However, the additional standard deductions for state and local real property tax, motor vehicle sales tax, and net disaster losses are no longer available.

Tax planning for higher-income taxpayers is more complicated. Generally, you must reduce your otherwise allowable itemized deductions if your adjusted gross income exceeds a specified threshold amount. However, the phase-out of itemized deductions and personal exemptions for higher-income taxpayers is eliminated through 2012 by the Tax Relief Act of 2010. The failure to take the alternative minimum tax (AMT) into account may also jeopardize your tax planning strategy, as the AMT continues to negate many itemized deductions. The Tax Relief Act of 2010 increased the AMT exemptions amounts for the 2010 and 2011 tax years, which provides some relief from this tax burden.  

Although maximizing your itemized deductions is an important aspect of tax planning, there are other issues that you may need to consider in light of your overall tax scenario. We hope to provide you with planning options that enable you to achieve the greatest tax savings possible.

Give me a call if you want to implement a specific tax strategy.

1. 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 http:www.IRS.gov or by calling 800-829-1040. Taxpayers who request and are granted an additional 60 to 120 days to pay the tax in full generally will pay less in penalties and interest than if the debt were repaid through an installment agreement over a greater period of time. We can assist you in evaluating these options.

2. Installment Agreement We can assist you in setting up an installment agreement with the IRS. If you owe $25,000 or less in combined tax, penalties and interest we can usually apply on your behalf and get immediate acknowledgement and approval.   

3. Pay by Credit Card or Debit Card You can charge your taxes on your American Express, MasterCard, Visa or Discover credit cards. Additionally, you can pay by using your debit card. However, the debit card must be a Visa Debit Card, or a NYCE, Pulse or Star Debit Card. To pay by credit card or debit card, contact one of the service providers at its telephone number or Web site listed below and follow the instructions. There is no IRS fee for credit or debit card payments, but the processing companies charge a convenience fee or flat fee. If you are paying by credit card, the service providers charge a convenience fee based on the amount you are paying. If you are paying by debit card, the service providers charge a flat fee of $3.89 to $3.95.  Do not add the convenience fee or flat fee to your tax payment.

The processing companies are:

Link2Gov Corporation:

To pay by debit or credit card: 888-PAY-1040 (888-729-1040), www.pay1040.com

RBS WorldPay, Inc.

To pay by debit or credit card: 888-9PAY-TAX (888-972-9829), www.payUSAtax.com

Official Payments Corporation:

To pay by debit or credit card: 888-UPAY-TAX (888-872-9829), www.officialpayments.com/fed

For more information about filing and paying your taxes, Give us a call.

1.     Refund Options You have three options for receiving your individual federal income tax refund: direct deposit, U.S. Savings Bonds or a paper check. You can now use your refund to buy up to $5,000 in U.S. Series I Savings Bonds in multiples of $50.

2.     Separate Accounts You may use Form 8888, Allocation of Refund (Including Savings Bond Purchases), to request that your refund be allocated by direct deposit among up to three separate accounts, such as checking or savings or retirement accounts. You may also use this form to buy U.S Savings Bonds.

3.     Tax Return Processing Times If you file a complete and accurate paper tax return, your refund will usually be issued within six to eight weeks from the date it is received. If you filed electronically, your refund will normally be issued within three weeks after the acknowledgment date.

4.     Check the Status Online The fastest and easiest way to find out about your current year refund is to go to IRS.gov and click the “Where’s My Refund?” link at the IRS.gov home page. To check the status online you will need your Social Security number, filing status and the exact whole dollar amount of your refund shown on your return.

5.     Check the Status By Phone You can check the status of your refund by calling the IRS Refund Hotline at 800–829–1954. When you call, you will need to provide your Social Security number, your filing status and the exact whole dollar amount of the refund shown on your return…for the full list, please go to our tax center on our website, www.mbflegal.com!!

1.     If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct contributions made to specific individuals, political organizations and candidates. The IRS publishes rules on what constitutes a qualified organization so if you are wondering about a given organization give me a call.

2.     To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.

3.     If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.

4.     Donations of stock or other non-cash property are usually valued at the fair market value of the property. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations… for the full list, please visit our tax center at www.mbflegal.com!

Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction.  Here are six things to know about the Home Office deduction

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• as your principal place of business, or
• as a place to meet or deal with patients, clients or customers in the normal course of your business, or
• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on-line 30 of Form 1040 Schedule C, Profit or Loss From Business.

6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

I hope this helps you determine if you can write off your home. If you have questions give me a call. I’m living at my office!!