2013 Tax Updates & TYS News

2013 Tax Updates

As you may be aware, there were numerous tax changes that were accepted into law for 2012 and 2013 this past week.  For details on these tax updates, please visit our website at http://www.tysllp.com/newsletters/2013taxupdates/.

Our New York Office Has Moved

Effective January 1, 2013 our New York office address is:

615 Cross Keys Office Park
Fairport, NY 14450
T: (585) 678-9015
F: (585) 678-9384

Office Closure

Our offices will be closed on Thursday, January 10, 2013 and Friday, January 11, 2013.  We will resume normal business hours on Monday, January 14, 2013.

 

S Corporation Medical Insurance Premiums

If you own more than 2% of an S Corporation then you need to be aware of the following.  

Health and accident insurance premiums paid by your corporation on your behalf must be reported as income on your annual Form W-2.  If the insurance premiums are not included in the W-2 then the IRS will not allow the corporation to deduct them.  The Shareholder, in most cases, is allowed to have an equal deduction on their individual tax returns.  At the end of the day, there is no impact other than the additional headache of getting the amounts reported correctly on the W-2.

One thing to be aware of is that amounts added to the W-2 should not be subject to any payroll taxes.

If this affects you and you would like additional information on how to report company paid health insurance premiums, or if you are a greater than two percent S corporation shareholder receiving this taxable income and would like information about what this means to you, please contact us at info@tysllp.com.

President Signs Payroll Tax Cut Bill

About 6:59 PM eastern time yesterday evening (February 22), President Obama signed the Middle Class Tax Relief and Job Creation Act (H.R. 3630) into law.  The bill extends the payroll tax cut and jobless benefits through the end of the year. 

The bill will continue the 2% reduction in the social security tax paid by employees in their paychecks.   The rate, currently at 4.2% will remain until the end of the year.  Good news for the employees.

Included in the bill is a repeal of the recapture provision that existed in the temporary cut done in December.  For those that had large income in January & February, you will not need to repay any of your savings under the new bill.

Top Earners Doubled Share of Nation’s Income

The top 1 percent of earners more than doubled their share of the nation’s income over the last three decades, the Congressional Budget Office said Tuesday, in a new report likely to figure prominently in the escalating political fight over how to revive the economy, create jobs and lower the federal debt. In addition, the report said, government policy has become less redistributive since the late 1970s, doing less to reduce the concentration of income. “The equalizing effect of federal taxes was smaller” in 2007 than in 1979, as “the composition of federal revenues shifted away from progressive income taxes to less-progressive payroll taxes,” the budget office said. Also, it said,federal benefit payments are doing less to even out the distribution of income, as a growing share of benefits, like Social Security, goes to older Americans, regardless of their income. In its report, the budget office found that from 1979 to 2007, average inflation-adjusted after-tax income grew by 275 percent for the 1 percent of the population with the highest income. For others in the top 20 percent of the population, average real after-tax household income grew by 65 percent. By contrast, the budget office said, for the poorest fifth of the population, average real after-tax household income rose 18 percent. And for the three-fifths of people in the middle of the income scale, the growth in such household income was just under 40 percent. The findings, based on a rigorous analysis of data from the Internal Revenue Service and the Census Bureau, are generally consistent with studies by some private researchers and academic economists. But because they carry the imprimatur of the nonpartisan budget office, they are likely to have a major impact on the debate in Congress over the fairness of federal tax and spending policies. Also cited as factors contributing to the rapid growth of income at the top were the structure of executive compensation; high salaries for some “superstars” in sports and the arts; the increasing size of the financial services industry; and the growing role of capital gains, which go disproportionately to higher-income households.

Relief Provided for CA Winter Storm Victims

The Franchise Tax Board (FTB) has announced that special tax relief is available for California corporate and individual income taxpayers affected by the recent winter storms that occurred in California from December 17, 2010, through January 4, 2011. The storms were declared a federal disaster in 10 counties on January 26, 2011. The counties declared major disaster areas include Inyo, Kern, Kings, Orange, Riverside, San Bernardino, San Diego, San Luis Obispo, Santa Barbara, and Tulare. Affected taxpayers may claim their disaster losses in the current or the prior tax year. Claiming the loss on a previously filed tax return allows the FTB to issue refunds quickly. Taxpayers claiming the disaster loss should write "California Winter Storms 2010" in red ink at the top of their tax return to alert the FTB to expedite the refund. If taxpayers are e-filing, they should follow the software instructions to enter the disaster information. Taxpayers can get forms for an amended 2009 tax return or an original 2010 tax return on the FTB's website at http://ftb.ca.gov/. Taxpayers needing copies of lost or damaged state returns should complete Form FTB 3516, Request for Copy of Tax Return, available online. Disaster victims can receive copies of their tax returns for free. They should print "California Winter Storms 2010" in red ink at the top of their requests. More information about disaster losses is available in FTB Publication 1034, Disaster Loss, IRS Publication 547, Casualties, Disasters, and Thefts. Taxpayers who have questions about their accounts can call the FTB toll-free at (800) 852.-5711, Monday through Friday, from 7 a.m. to 5 p.m.

Franchise Tax Board Auditing Head Of Household Returns

Sacramento - The Franchise Tax Board (FTB) announced mailing more than 135,000 review letters to taxpayers who claimed the “Head of Household” filing status on their 2009 state tax return.

Taxpayers who do not qualify will have their tax reassessed at either a single or married-filing-separate filing status. Nearly 29,000 taxpayers who used this status last year did not meet its requirements and were issued more than $31 million in tax assessments.

Each year FTB reviews tax returns of taxpayers who claim the Head of Household filing status because the qualifications are commonly misunderstood. The status generally results in lower tax liabilities for unmarried taxpayers who care for a dependent. To qualify, the taxpayer must provide care for more than one-half of the year and pay more than one-half the cost of maintaining their home. The qualifying person must be related to the taxpayer and meet the requirements to be a qualifying child or relative. More than 2 million California taxpayers use this filing status each year.

FTB advises taxpayers who receive an audit letter to respond promptly by completing the enclosed questionnaire. Failure to respond could result in a tax assessment and penalty. Questionnaires can be submitted by any of these methods:

• Respond electronically at ftb.ca.gov. Use HOH Audit Letter Web Response page.
• Respond by fax at 866.223.8195.
• Respond by mail using the pre-addressed envelope provided with the audit letter.

FTB provides the following tools on its website to assist taxpayers:

• Head of Household “self-test.”
• Answers to frequently asked questions.
• Publication 1540, “CA Head of Household Filing Status,” in English and Spanish.

OBAMA TO PUSH TAX BREAK

It has been awhile since our last post so I thought this would be a good one to get back on track. I received the following news alert today and thought I would share it. As it says below the details will be released this coming Wednesday but if it does include the ability to write off 100% of new purchases for plant and equipment it could be a huge benefit for lots of businesses. I'm sure there will be all kinds of caveats and limitations but lets keep our fingers crossed that some of this actually comes to be.

__________________________________ News Alert from The Wall Street Journal

President Barack Obama, in one of his most dramatic gestures to business, will propose that companies be allowed to write off 100% of their new investment in plant and equipment through 2011, a plan that White House economists say would cut business taxes by nearly $200 billion over two years. The proposal, to be laid out Wednesday in a speech in Cleveland, tops a raft of announcements, from a proposed expansion of the research and experimentation tax credit to $50 billion in additional spending on roads, railways and runways. http://online.wsj.com/article/SB10001424052748704392104575475920686869934.html?mod=djemalertNEWS

Tax Exempt Organizations

I thought this might be of interest for those of you with tax exempt organizations. There have been some significant changes to the Form 990. If you haven't looked into the changes I would recommend doing that sooner rather than later. It may take longer to prepare the return this year. The IRS posted a list of FAQs (updated 4/5/10) to www.irs.gov/charities/article/0,,id=96581,00.html on the annual reporting requirements for exempt organizations. The applicable return (Form 990 or Form 990-EZ, the short form return) is due on the 15th day of the 5th month after the end of the organization's tax year. This is May 15th for calendar year organizations. Organizations with gross receipts and assets below certain thresholds at the end of their tax year can file Form 990-EZ. In addition, certain church-affiliated organizations and governmental organizations are not required to file an annual return. Organizations whose annual gross receipts are normally less than $25,000 are not required to file an annual return, but may be required to file an annual electronic notice (e-Postcard).

Haiti Donations Deductible for California

From the California Franchise Tax Board Tuesday:

The Franchise Tax Board (FTB) announced today that a new state law allows taxpayers to immediately deduct their donations made to provide relief for the January 12 Haitian earthquake.

"This is welcome news for Californians who are supporting earthquake recovery efforts in Haiti," said State Controller and FTB Chair John Chiang.

Charitable deductions are normally taken on a tax return the following calendar year. The new law gives donating taxpayers the added option to claim the deductions immediately on their 2009 returns instead of waiting to claim it on their 2010 returns.

To claim the charitable deduction on the 2009 tax return, both individuals and businesses must have made the Haitian-relief contributions to qualified charities before March 1, 2010. Only cash contributions such as those made by text message, check, credit card or debit card qualify. The contributions must be made specifically for the relief of victims in areas affected by the January 12, 2010, earthquake in Haiti.

The new legislation, Assembly Bill 347 (Stats 2010, Ch. 8), conforms to similar federal law (Haitian Relief Bill H.R. 4462; P.L. 111-126).

Information on the federal law is available in our previous post here.

Accelerated California Estimated Taxes Required

In an effort the keep cash coming into the state coffers, the legislature included in the most recent budget a provision requiring taxpayers who make estimated tax payments to pay more upfront. This applies to both individual and corporate taxpayers. Taxpayers may be required to make estimated tax payments if their withholding will not cover their tax liability. For federal tax purposes, the payments must be paid in four equal quarterly installments. Starting in 2009 with the state's fiscal challenges, California began to require a higher percentage of the payments in earlier quarters. Starting in 2010, it is accelerating required payments even more, to the following schedule:

Quarter	% due
1st quarter	30%
2nd quarter	40%
3rd quarter	0%
4th quarter	30%

If you are required to make estimated tax payments, be sure to reference these new requirements.

Tax Tips: Children's Investment Income

IRS Tax Tip 2010-38

The IRS wants parents to be aware of the tax rules that affect their children’s investment income. The following four facts will help parents determine whether their child’s investment income will be taxed at the parents’ rate or the child’s rate.

1. Investment Income Children with investment income may have part or all of this income taxed at their parents’ tax rate rather than at the child’s rate. Investment income includes interest, dividends, capital gains and other unearned income.
2. Age Requirement The child’s tax must be figured using the parents’ rates if the child has investment income of more than $1,900 and meet one of three age requirements for 2009: a. The child was born after January 1, 1992. b. The child was born after January 1, 1991, and before January 2, 1992, and has earned income that does not exceed one-half of their own support for the year. c. The child was born after January 1, 1986, and before January 2, 1991, and a full-time student with earned income that does not exceed one-half of the child’s support for the year.
3. Form 8615 To figure the child's tax using the parents’ rate for the child’s return, fill out Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, and attach it to the child's federal income tax return.
4. Form 8814 When certain conditions are met, a parent may be able to avoid having to file a tax return for the child by including the child’s income on the parent’s tax return. In this situation, the parent would file Form 8814, Parents' Election To Report Child's Interest and Dividends.

More tax tips are available on the IRS website.

Tax Credit for New Jobs

Yesterday, the California Franchise Tax Board (FTB) posted answers to Frequently Asked Questions about a new tax credit that is available starting with the 2009 tax year. Here are some facts about the credit:

• A new tax credit of $3,000 for each additional full-time employee hired is available to small businesses with 20 or less employees beginning January 1, 2009.
• The credit is not subject to the 50% limitation for business credits.
• The total amount of credit available to be claimed by all taxpayers is capped at $400 million.
• The credit must be claimed on a timely filed original return received by the Franchise Tax Board on or before a cut-off date specified by the Franchise Tax Board.
• Taxpayers claiming the credit on an original return received by the Franchise Tax Board after the cut-off date is met will be notified that the credit has been denied.
• Taxpayers that have been denied the credit as a result of the $400 million cap being reached will not be assessed an underpayment of estimated tax or underpayment of tax penalty to the extent the underpayment was created or increased by the disallowance of this credit.

An employer will qualify for the credit if:

• Each qualified full-time hourly employee is paid wages for not less than an average of 35 hours per week.
• On the last day of the preceding taxable year, they employed a total of 20 or fewer employees.
• Each qualified full-time employee that is a salaried employee was paid compensation during the year for full-time employment within the meaning of Section 515 of the Labor Code.
• There is a net increase in qualified full-time employees compared to the number of full-time employees employed in the preceding taxable year. For taxpayers who first commence doing business in California during the taxable year, the number of qualified full-time employees employed in the preceding year would be generally be zero, unless certain special rules apply.

An employer may not claim the credit for those employees who are any of the following:

• Certified as a qualified employee in an enterprise zone or targeted tax area.
• Certified as a qualified disadvantaged individual in a manufacturing enhancement area.
• Certified as a qualified disadvantaged individual or qualified displaced employee in a local agency military base recovery area.
• An employee whose wages are included in calculating any other credit allowed.

More information is available on the FTB website.

Accelerated Deduction for Haiti Relief

On Friday, the President signed into law a special provision allowing taxpayers to deduct on their 2009 tax returns charitable contributions made to provide relief in Haiti. Today's IRS announcement provides guidance on the deduction, including the following requirements for a 2009 deduction:

• Only cash contributions qualify. This includes contributions made by text message, check, credit card or debit card.
• The contribution must be made after Jan. 11, 2010, and before March 1, 2010.
• The contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti.
• Taxpayers have the option of deducting these contributions on either their 2009 or 2010 returns, but not both.
• To get a tax benefit, taxpayers must itemize their deductions on Schedule A. Those who claim the standard deduction, including all short-form filers, are not eligible.

We do not have word yet as to whether California will conform to this legislation. We'll keep you posted.

Tax Credit Helps Pay for Higher Education Expenses

The IRS provides the following information about the new credit for higher education... The American Recovery and Reinvestment Act was passed in early 2009 and created the American Opportunity Credit. This educational tax credit – which expanded the existing Hope credit – helps parents and students pay for college and college-related expenses. Here are the top nine things the Internal Revenue Service wants you to know about this valuable credit and how you can benefit from it when you file your 2009 taxes. 1. The credit can be claimed for tuition and certain fees paid for higher education in 2009 and 2010. 2. The American Opportunity Credit can be claimed for expenses paid for any of the first four years of post-secondary education. 3. The credit is worth up to $2,500 and is based on a percentage of the cost of qualified tuition and related expenses paid during the taxable year for each eligible student. This is a $700 increase from the Hope Credit. 4. The term "qualified tuition and related expenses" has been expanded to include expenditures for required course materials. For this purpose, the term "course materials" means books, supplies and equipment required for a course of study. 5. Taxpayers will receive a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year. 6. Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back. 7. To be eligible for the full credit, your modified adjusted gross income must be $80,000 or less -- $160,000 or less for joint filers. 8. The credit begins to decrease for individuals with incomes above $80,000 or $160,000 for joint filers and is not available for individuals who make more than $90,000 or $180,000 for joint filers. 9. The credit is claimed using Form 8863, Education Credits, (American Opportunity, Hope, and Lifetime Learning Credits), and is attached to Form 1040 or 1040A. For more information about the American Opportunity Tax Credit visit the IRS Web site at IRS.gov/recovery.

Worker classification audits on the way

As we've posted before, the IRS is increasing enforcement efforts related to worker classification -- meaning the issue of treating a worker as an employee or an independent contractor. AccountingWeb provides an update on these efforts:

Beginning in February, 2010, the IRS is launching an examination of 6,000 randomly selected companies to focus on employment tax issues ranging from executive compensation to fringe benefits. The IRS will perform an examination of 2,000 random companies per year over the next three years. Companies targeted will be of varying sizes and include both for profit and non-profit employers. While these audits can target any reporting aspect of the tax return the IRS's primary focus will be on worker classification, executive compensation, fringe benefits, nonfilers and reimbursed expenses.

More information on this issue, including examples of worker classification for the construction industry, is available on the FAQ section of our website.

IRS Offers Tax Tips

With tax time approaching, the IRS offers a series of Tax Tips for 2010 on topics such as dependents, filing status, and tips for recently married or divorced taxpayers. The following are what the IRS called the Top Ten Tax Time Tips:

• Start gathering your records. Round up any documents or forms you’ll need when filing your taxes: receipts, canceled checks and other documents that support an item of income or a deduction you’re taking on your return.
• Be on the lookout. W-2s and 1099s will be coming soon from your employer; you’ll need these to file your tax return.
• Try e-file. When you file electronically, the software will handle the math calculations for you. If you use direct deposit, you will get your refund in about half the time it takes when you file a paper return. E-file is now the way the majority of returns are filed. In fact, last year, 2 out of 3 taxpayers used e-file.
• Check out Free File. If your income is $57,000 or less you may be eligible for free tax preparation software and free electronic filing. The IRS partners with 20 tax software companies to create this free service. Free File is for the cost conscious taxpayer who wants reliable question-and-answer software to help them prepare a return. Visit IRS.gov to learn more.
• Consider other filing options. There are many different options for filing your tax return. You can prepare it yourself or go to a tax preparer. You may be eligible for free face-to-face help at an IRS office or volunteer site. Give yourself time to weigh all the different options and find the one that best suits your needs.
• Consider Direct Deposit. If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a paper check.
• Visit IRS.gov again and again. The official IRS Web site is a great place to find everything you’ll need to file your tax return: forms, tips, answers to frequently asked questions and updates on tax law changes.
• Remember this number: 17. Check out Publication 17, Your Federal Income Tax on IRS.gov. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return.
• Review! Review! Review! Don’t rush. We all make mistakes when we rush. Mistakes will slow down the processing of your return. Be sure to double-check all the Social Security Numbers and math calculations on your return as these are the most common errors made by taxpayers.
• Don’t panic! If you run into a problem, remember the IRS is here to help. Try IRS.gov or call our customer service number at 800-829-1040.

Another source for answers to FAQs is the FAQ section of our website.

That time of year!

With tax time upon us, the IRS has again reminded taxpayers to use caution in choosing a tax preparer in its January 3 article titled How to Choose a Tax Return Preparer and Avoid Preparer Fraud. The IRS explains:

While most preparers provide honest service to their clients, the IRS urges taxpayers to be careful when choosing a preparer –– as careful as they would be choosing a doctor or lawyer. Even if someone else prepares a tax return, the taxpayer is ultimately responsible for all the information on the return. For that reason, taxpayers should never sign a blank tax form. And they should review the return before signing it and ask questions on entries they don't understand.

The article goes on to provide the following specific suggestions when choosing a preparer:

• Be cautious of tax preparers who claim they can obtain larger refunds than other preparers.
• Avoid preparers who base their fee on a percentage of the refund.Use a reputable tax professional who signs the tax return and provides a copy.
• Consider whether the individual or firm will be around to answer questions about the preparation of the tax return months, or even years, after the return has been filed.
• Check the person’s credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
• Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

The California Franchise Tax Board often issues similar advice. As we've said before, regardless of whether you choose ThomasYork as your preparer, we encourage you to follow this counsel!

IRS Announces 2010 Standard Mileage Rates

The Internal Revenue Service today issued the 2010 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, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 50 cents per mile for business miles driven
• 16.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than last year’s. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago. 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 any vehicle used for hire or for more than four vehicles used simultaneously. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. Revenue Procedure 2009-54 contains additional details regarding the standard mileage rates.

Newsletter on Year-End Tax Planning

Our firm sends an occasional e-newsletter on such topics as tax planning, current tax developments, and important compliance matters. Our most recent e-newsletter on year-end tax planning for 2009 includes discussion about such items as:

• Expiring opportunities in depreciation.
• Expiring deduction for sales tax on new car purchase.
• Extended carryback period for business losses.
• Extended & Expanded Homebuyer Credit.
• Energy credits.
• Charitable donations.
• 401(k) contributions.
• Health savings accounts (HSAs).
• Health flexible spending accounts.
• Dependent care FSAs.
• Self-employed plans.
• Retirement income.
• IRA conversion.
• Capital losses.
• Income Deferral.
• AMT Considerations.
• Gift tax.
• Kiddie tax reminder.

If you would like to read the full newsletter, or subscribe for future newsletters, you may visit our Newsletter Archives.

Expansion of 5-year carryback election for NOLs

On Nov. 6, 2009, President Obama signed the “Worker, Homeownership, and Business Assistance Act of 2009” (the 2009 Assistance Act) into law. The Act includes tax changes for businesses, the most significant of which are liberalized rules for certain net operating losses (NOLs). If your 2008 or 2009 tax return results in a net operating loss, you may benefit from this provision.

A net operating loss (NOL) is the excess of business deductions (computed with certain modifications) over gross income in a particular tax year. The loss can be deducted, through an NOL carryback or carryover, in another tax year in which gross income exceeds business deductions. In general, NOLs may be carried back two years and forward 20 years. The NOL is first carried back to the earliest tax year for which it's allowable as a carryback or a carryover, and is then carried to the next earliest tax year. A taxpayer may elect to forego the entire carryback period for an NOL and instead carry it forward. The 2009 Assistance Act provides an election for most taxpayers (not just small businesses) to increase the carryback period for an applicable NOL to 3, 4, or 5 years from 2 years. An applicable NOL means the taxpayer's NOL for any tax year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010. This means the election may be made for a tax year beginning or ending in either 2008 or 2009. Taxpayers electing a 5-year carryback can use the NOL to offset up to 50% of the available taxable income for the 5th tax year preceding the loss year, and 100% of all taxable income in the remaining 4 carryback years. The amount of the NOL otherwise carried to tax years after the 5th preceding tax year is adjusted to take into account that the NOL could offset only 50% of the taxable income for the 5th year. In addition, the Act suspends the 90% limitation on the use of an NOL deduction for alternative minimum tax purposes, for alternative tax NOLs attributable to carrybacks for which the extended carryback is elected. We will work with our clients individually to determine whether they might benefit from this new provision.