Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the individual income tax rates were scheduled to revert from 10, 15, 25, 28, 33 and 35 percent to 15, 28, 31, 36 and 39.6 percent after December 31, 2010. The Act now...

INDIVIDUALS

Individual Tax Rates

Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the individual income tax rates were scheduled to revert from 10, 15, 25, 28, 33 and 35 percent to 15, 28, 31, 36 and 39.6 percent after December 31, 2010. The Act now extends the 10-percent rate and the other reduced individual income tax rates for two years, through December 31, 2012, for all taxpayers.

Combined with the payroll tax cut that’s also part of this Act, the extension of the individual rate cuts will give many people a significant increase in immediate dollars available to them in 2011 over what would have resulted without this bill. For example, an individual earning $50,000 in 2011 will see a $1,890 tax savings in combined income tax and payroll tax rate reductions over what was scheduled under the EGTRRA sunset.

Capital Gains/Dividends

Qualified capital gains and dividends currently are taxed at a maximum rate of 15 percent (zero percent for taxpayers in the 10- and 15-percent income tax brackets) for 2010. The Act continues this treatment for two years.

It also provides for treating dividends received from a regulated investment
company (RIC), real estate investment trust (REIT) and other qualified pass-through entities as qualified dividends for purposes of the reduced tax rates. Also extended are rules for collapsible corporations, the accumulated earnings tax and personal holding companies.

Itemized Deduction Limitation

The “Pease” limitation reduces the total amount of a higher-income individual’s otherwise allowable deductions. The Pease limitation is repealed for 2010 but was scheduled to return in full after 2010 under EGTRRA’s sunset rules. The Act extends repeal of the limitation for two years.

Personal Exemption Phaseout

Before 2010, taxpayers with incomes over certain thresholds were subject to the personal exemption phaseout (PEP). The PEP reduced the total amount of exemptions that may be claimed by two percent for each $2,500 or portion thereof ($1,250 for married couples filing separate returns) by which the taxpayer’s adjusted gross income exceeded the applicable threshold (projected for 2011 to start at $169,550 for singles, $254,350 for joint filers). Under EGTRRA, the PEP was repealed for 2010. The Act extends repeal of the PEP for two years.

Marriage Penalty Relief

EGTRRA provided relief from the so-called marriage penalty by increasing the basic standard deduction for a married couple filing a joint return to twice the amount for a single individual. The Act extends EGTRRA’s marriage penalty relief for two years.

Child Tax Credit

The Act extends the $1,000 child tax credit for two years, through December 31, 2012. Also extended for two years are enhancements to the credit made in EGTRRA, the 2009 Recovery Act and other bills. Under the EGTRRA sunset, the child credit would revert to $500 per qualifying child.

Earned Income Credit

EGTRRA and subsequent legislation temporarily increased the beginning and end points of the earned income tax credit, increased the credit for three or more children and made other taxpayer friendly changes. The enhanced EITC is now extended for two years.

Adoption Credit

EGTRRA increased the dollar limitation for the adoption credit and the income exclusion for employer-paid or reimbursed adoption expenses to $10,000 (indexed for inflation). The Patient Protection and Affordable Care Act increased the credit and exclusion by another $1,000 (adjusted for inflation) for 2010 and 2011 and also made the adoption credit refundable. The Act extends the enhancements in EGTRRA to the credit and exclusion amount through December 31, 2012.

Dependent Care Credit

A taxpayer who incurs expenses to care for a child under age 13 or for an incapacitated dependent or spouse to work or look for work can claim a dependent care credit. EGTRRA temporarily increased the maximum amount of eligible expenses for the dependent care credit from $2,400 to $3,000 (from $4,800 to $6,000 for more than one qualifying individual). EGTRRA also raised the maximum credit from 30 to 35 percent of qualifying expenses and provided for a reduction in the credit, but not below 20 percent, by one percentage point for each $2,000, or fraction thereof, of AGI above a $15,000 threshold. The enhanced dependent care credit is now extended for two years.

Employer-provided Child Care

Under EGTRRA, employers may qualify for a tax credit if they make available child care to employees before 2011. The credit reaches $150,000 for qualified costs. The Act extends the credit through December 31, 2012.

American Opportunity Tax Credit

The 2009 Recovery Act enhanced and renamed the Hope education credit as the American Opportunity Tax Credit (AOTC) for 2009 and 2010. The Act extends the AOTC for two years. Also extended are income limitations (the AOTC begins to phase out for single individuals with modified AGI of $80,000 ($160,000 for married couples filing jointly) and completely phases out for single individuals with modified AGI of $90,000 ($180,000 for married couples filing jointly).

Education

The Act includes several provisions relating to educational assistance exclusion, student loan interest deduction, Coverdell Education Savings Accounts and scholarships.

Individual Tax Extenders

The Act extends a number of temporary individual tax incentives that expired at the end of 2009. These incentives, known as extenders, are extended for two years (2010 and 2011). The individual incentives extended in the Act are: state and local sales tax deduction; higher education tuition deduction; teacher’s classroom expense deduction; charitable contribution of IRA proceeds; and charitable contributions of appreciated property for conservation purpose.

ALTERNATIVE MINIMUM TAX

The Act provides an AMT “patch” intended to prevent the AMT from encroaching on middle-income taxpayers by providing higher exemption amounts and other targeted relief for 2010 and 2011. Without this patch, which expired at the end of 2009, an estimated 21 million additional households would be subject to its reach. The Act increases the exemption amounts for 2010 to $47,450 for individual taxpayers and to $72,450 for married taxpayers filing jointly. For 2011, the amounts would be increased to $48,450 for individuals and $74,450 for married taxpayers filing jointly.

PAYROLL TAX CUT

The Act reduces the employee-share of OASDI (Social Security tax) from 6.2 percent to 4.2 percent for wages earned in calendar year 2011 up to $106,800. Self employed individuals would pay 10.4 percent on self-employment income up to the threshold. The new payroll tax holiday is estimated to inject $120 billion into the economy in 2011.

FEDERAL ESTATE TAX

EGTRRA gradually reduced over a period of years and then abolished the federal estate tax for decedents dying in 2010. The pre-EGTRRA estate tax (with a maximum tax rate of 55 percent and a $1 million exclusion) was scheduled to be revived after 2010. Additional EGTRRA changes affected the gift tax and the generation-skipping transfer (GST) tax.

Estate Tax Compromise

The Act revives the estate tax for decedents dying after December 31, 2009, but at a significantly higher level than had been scheduled after 2010 under EGTRRA. The maximum estate tax rate is 35 percent with an exclusion amount of $5 million. This new estate tax regime, however, is itself temporary and is scheduled to sunset on December 31, 2012.

Together with the revival of the estate tax, the Act eliminates the modified carryover basis rules and replaces them with the stepped up basis rules that had applied until 2010. Property with a stepped-up basis receives a basis equal to the property’s fair market value on the date of the decedent’s death (or on an alternate valuation date). Under a modified carryover basis that

EGTRRA had put into place for 2010, the executor may increase the basis of estate property only by a total of $1.3 million, with other estate property taking a carryover basis equal to the lesser of the decedent’s basis or the fair market value of the property on the decedent’s death.

Option for 2010

The Act gives estates of decedents dying after December 31, 2009 and before January 1, 2011, the option to elect not to come under the revived estate tax. It gives those estates the option to elect to apply (1) the estate tax based on the new 35 percent top rate and $5 million exemption, with stepped-up basis or (2) no estate tax and modified carryover basis rules under EGTRRA. Any election would be revocable only with the consent of the IRS.

Portability

The Act provides for “portability” between spouses of the maximum exclusion. Generally, portability would allow a surviving spouse to elect to take advantage of the unused portion of the estate tax exclusion of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount. A deceased spousal exclusion amount would be available to the surviving spouse only if an election is made on a timely filed estate tax return. Portability would be available after December 31, 2010.

State death tax credit/deduction

EGTRRA repealed the state death tax credit for decedents dying after 2004 and replaced the credit with a deduction. Under EGTRRA’s sunset provisions, the credit, as it existed before 2002, is revived for decedents dying after 2010. The 2010 Act extends the deduction through 2012.

Filings

The Act gives estates of decedents dying after December 31, 2009 and before the date of enactment extended time (generally nine months) to perform certain acts. These include the filing of any return and the making of any payment.

Gift Taxes

For gifts made in 2010, the Act provides that gift tax is computed using a rate schedule having a top tax rate of 35 percent and a maximum applicable exclusion amount of $1 million. For gifts made after 2010, the gift tax is reunified with the estate tax with a top gift tax rate of 35 percent and a maximum applicable exclusion amount of $5 million.

GST Tax

The Act provides a $5 million exemption for 2010 (equal to the exclusion for estate tax purposes) with a GST tax rate of zero percent for 2010. For transfers made after 2010, the GST tax rate would be equal to the highest estate and gift tax rate in effect for the year (35 percent for 2011 and 2012). The Act also extends certain technical provisions under EGTRRA affecting the GST tax.

BUSINESS INCENTIVES

Also included are a series of business incentives, including provisions relating to: The Work Opportunity Tax Credit; 100 percent bonus depreciation; Code Sec. 179 expensing; research tax credit; small business capital gains; and numerous business tax extenders.

ADDITIONAL INCENTIVES

The Act also extends a number of energy tax incentives, primarily targeted to businesses, scheduled to expire after 2010. One popular energy incentive for individuals, the Code Sec. 25C residential energy property credit would be extended but with some limitations. Also extended are a series of disaster and charitable incentives.

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.

The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.

Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.

The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.

The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.

Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.

To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.

The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.

Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

Payroll tax cut

The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.

Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.

Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.

House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.

One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.

Extenders

The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.

President Obama’s FY 2013 proposals

President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.

Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.

On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.

If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

Previous disclosure programs

The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.

Reopened program

The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.

The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.

In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.

The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.

Quiet disclosures

One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.

Critics

The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.

If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Dependency Exemption

In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.

Child Tax Credit

Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.

Child and Dependent Care Credit

If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.

Adoption Credit

Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.

Higher Education Credits

There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.

Extended Health Care Coverage

Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.

Child Care Assistance Credit (for businesses)

Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.

If you have any questions about these provisions and how they may benefit you, please contact our office.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

Offset

If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.

A taxpayer’s refund may be reduced by FMS and offset to pay:

• Past-due child support
• Federal agency non-tax debts
• State income tax obligations, or
• Certain unemployment compensation debts owed a state.

FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.

Form 8379

If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.

The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.

The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

February 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.

February 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.

February 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.

February 10

Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.

February 15

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.

February 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.

February 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.

February 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.

February 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.

March 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.

March 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of August 2011.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of August 2011.

August 1

Employers.  Employers file Form 941 for the second quarter of 2011.

Employers.  Certain small employers deposit any undeposited tax if your tax liability is $2,500 or more for 2011 but less than $2,500 for the second quarter.

August 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 27-29.

August 5

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 30-August 2.

August 10

Employees who work for tips. Employees who received $20 or more in tips during July must report them to their employer using Form 4070.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 3-5.

August 12

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 6-9.

August 15

Monthly depositors. Monthly depositors must deposit employment taxes for payments in July.

August 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 10-12.

August 19

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 13-16.

August 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 17-19.

August 26

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 20-23.

August 31

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 24-26.

Early in 2011, the IRS announced a series of measures to help taxpayers buffeted by the economic slowdown. The IRS calls these measures its “Fresh Start” program and they are intended help taxpayers who want to pay their tax liabilities but because of unemployment, slow business sales or for other legitimate reasons, cannot pay their tax debts. One of the most attractive features of the Fresh Start program involves the withdrawal of a tax lien.

Early in 2011, the IRS announced a series of measures to help taxpayers buffeted by the economic slowdown. The IRS calls these measures its “Fresh Start” program and they are intended help taxpayers who want to pay their tax liabilities but because of unemployment, slow business sales or for other legitimate reasons, cannot pay their tax debts. One of the most attractive features of the Fresh Start program involves the withdrawal of a tax lien.

Liens

When the IRS files a notice of federal tax lien (NFTL) it makes a claim to a taxpayer’s property as security or payment for a tax debt. The IRS must follow very detailed procedures, including sending the taxpayer a notice and demand for payment. If the taxpayer pays the tax debt, the IRS must release the lien within a prescribed period of time; generally within 30 days after the taxpayer satisfies the tax due, including interest and other additions.

There is an important distinction between release of a lien and withdrawal of a lien. Although the IRS may release the lien, the lien generally continues to be reflected on the taxpayer’s credit report unless the lien is withdrawn. This can negatively affect a taxpayer’s ability to get credit or, in some cases, could have a negative impact on the taxpayer obtaining a job if the employer reviews the taxpayer’s credit history.

Full payment

Under the “Fresh Start” program, the IRS has announced that liens will be withdrawn immediately once full payment is made by the taxpayer. The IRS has instructed taxpayers, whose lien has been released after full payment, to request withdrawal of the lien in writing. Taxpayers use Form 12277, Application for Withdrawal, to make this request.

Direct Debit installment agreement

The IRS will also withdraw a lien if the taxpayer agrees to enter into a Direct Debit installment agreement. In this arrangement, the taxpayer consents to having funds automatically debited from a bank account for the agreed upon installment amount. The IRS prefers Direct Debit installment agreements because they are automatic: the taxpayer does not need to remember to send a check or money order.

Not everyone is eligible for lien withdrawal after entering into a Direct Debit installment agreement. The IRS has explained on its web site that qualifying taxpayers are individuals; active businesses with income tax liability only (this would exclude active businesses with unpaid employment taxes); and defunct businesses with any type of tax debt. The current amount owed by the taxpayer must be $25,000 or less. The IRS has advised on its web site that taxpayers owing more than $25,000 may pay down the balance to $25,000 prior to requesting the lien withdrawal to be eligible for the relief. Additionally, the taxpayer’s Direct Debit installment agreement must pay in full the amount owed within 60 months or before the collection statute expires, whichever is earlier. The taxpayer also must have made three consecutive Direct Debit Payments before the IRS will withdrawal the lien.

Taxpayers should use Form 12277 to request withdrawal of a lien after entering into a Direct Debit installment agreement. The IRS warned it will file a new NFTL if the taxpayer subsequently defaults on its Direct Debit installment agreement.

Lien filing thresholds

The IRS has also adjusted the lien filing threshold under the Fresh Start program. The Fresh Start changes increase the IRS lien filing threshold from $5,000 to $10,000. However, the IRS has reserved the right to file liens on amounts less than $10,000 when circumstances warrant.

If you have any questions about withdrawing a lien under the IRS “Fresh Start” program, please contact our office.

The IRS has announced that it will discontinue the high-low method used by taxpayers in a trade or business to substantiate travel expenses incurred while away from home.  The method, developed by the IRS, applies to travel expenses for meals, lodging and incidental expenses. It not only has provided a short-cut method for employers to cover the paperwork required to substantiate business travel deductions but in the past it has also helped the IRS streamline certain audits.

The IRS has announced that it will discontinue the high-low method used by taxpayers in a trade or business to substantiate travel expenses incurred while away from home.  The method, developed by the IRS, applies to travel expenses for meals, lodging and incidental expenses. It not only has provided a short-cut method for employers to cover the paperwork required to substantiate business travel deductions but in the past it has also helped the IRS streamline certain audits.

Background

Under the high-low method, the IRS provides optional per diem allowances that employers and employees are deemed to have substantiated.  The method can be used in lieu of substantiating actual travel-related expenses. The per diem amounts also satisfy the requirement that employees provide the employer with an adequate accounting of meal and lodging expenses.

The IRS publishes a list of localities classified as high-cost areas under the high-low method.  All other localities in the continental United States (CONUS) are classified as low-cost areas. The maximum per diem rate for high-cost areas is $233 for travel on or after October 1, 2010.  This represents $168 for lodging and $65 for meals and incidental expenses (M&IE).  The per diem rate for low-cost areas on or after October 1, 2010, is $160, which represents $108 for lodging and $52 for M&IE.

Waning interest

The IRS requested comments in 2010 on whether to continue the method and received no comments. The IRS interpreted such lack of interest as the deciding reason to discontinue the method.  It also reportedly has found the collection of data, as well as the politics that went into designating an area as “high cost,” growing more difficult when compared to the value of continuing the method in an environment in which digitized travel receipts are now so easily available. Taxpayers currently using the high-low method, however, can anticipate continuing to use it through 2011.

More guidance to come

Later in 2011, the IRS promises to issue a new revenue procedure, without the high-low method, that will provide general rules and procedures for substantiating lodging, meals and incidental expenses incurred in business travel away from home.  It is unlikely that the IRS will issue high-low rates for 2012.

Government employers use the per diem method widely, practitioners report.  Private industry, however, generally prefers to reimburse employees based on actual receipts and, therefore, only a small percentage of private businesses will expected to miss using the high-low method to substantiate travel expenses.

The federal debt limit negotiations that preoccupied Washington for most of July did not result in immediate tax legislation. However, the general debate did succeed in helping to jumpstart a serious discussion over taxes that now has the momentum to continue. Tax increases, rate hikes, rate reductions and general tax reform are now all on the table.

The federal debt limit negotiations that preoccupied Washington for most of July did not result in immediate tax legislation. However, the general debate did succeed in helping to jumpstart a serious discussion over taxes that now has the momentum to continue. Tax increases, rate hikes, rate reductions and general tax reform are now all on the table.

Whether tax legislation will be recommended and passed at year-end 2011 as the result of an immediate directive to start trimming the deficit is but one possible outcome of the debt-limit debates. Another increasingly persuasive catalyst for tax legislation will result from the many Congressional hearings on tax reform now being held on Capitol Hill. Those hearings are using as springboards initial proposals that have been introduced recently by the White House Deficit Commission Report, the Republican Study Committee, and the so-called Gang of Six, a bi-partisan group of Senators suggesting ways to cut trillions from the deficit over the next 10 years. Finally, the need for Congress to act on the Bush-era tax cuts set to expire after December 31, 2012, will all but force Congress to deal with tax reform in an era in which careful budgeting is essential to economic growth.

Administration's Proposals

At the center of President Obama's plan to trim the deficit is an extension of the Bush-era tax cuts for lower and middle income taxpayers after 2012, but not for some higher income taxpayers now in the top two rate brackets. Under the president's plan, taxes would increase for higher income individuals (which the White House defines as individuals with incomes above $200,000 and families with incomes above $250,000). The White House has also called for the elimination of certain oil and gas tax preferences, a permanent research tax credit and an extension of the 2011 payroll tax cut.

Gang of Six Tax Proposals

In early 2011, six members of the Senate (the Gang of Six) began negotiations on a comprehensive deficit reduction plan. On July 19, 2011, the senators released a bipartisan blueprint to reduce the budget deficit by $3.7 trillion over 10 years through a combination of spending cuts and revenue raisers.

Individual tax rates. The Gang of Six would replace the current individual marginal income tax rate schedule with three new tax brackets, ranging from: 8-12 percent; 14-22 percent; and 23-29 percent. The alternative minimum tax (AMT) would be repealed as well.

Tax expenditures. In return for lower tax rates and no AMT, the Gang of Six would reduce a yet unspecified number of "tax expenditures," aka deductions and credits. Possible tax expenditures up for reform, but not repeal, could include the home mortgage interest deduction, the deduction for charitable contributions and the deduction for certain medical expenses.

Corporate tax. The Gang of Six would establish a single, lower corporate tax rate of somewhere between 23 percent and 29 percent while promising to raise as much revenue as under the current corporate tax system by eliminating many yet-to-be specified business deductions, credits and other preferences. The Gang of Six would also move to a territorial tax system under which profits would be taxed only by the country where the income is earned.

House Republican Study Committee

The Republican Study Committee (RSC) is made up of 175 conservative members of the House. The RSC drafted the deficit reduction proposal which passed the House on July 19, 2011 as the Cut, Cap and Balance Act. The Cut, Cap and Balance Act, ultimately rejected by the Senate, did not include any tax increases.

Tax reform. The RSC has called for a "smarter" Tax Code that would lower rates while broadening the tax base. The RSC to date has not offered any further specifics on how it would lower rates and broaden the tax base. The RSC has previously indicated its opposition to any scaling back of the Bush-era tax cuts.

White House Deficit Commission

The bipartisan National Commission on Fiscal Responsibility and Reform issued its final report, "The Moment of Truth," in December 2010. The Commission developed a six-part plan designed to reduce the federal deficit by almost $4 trillion by 2020. The 18-member commission approved the report by a vote of 11-7, with Democrats and Republicans on both sides of the vote.

Tax reform. Tax reform as envisioned by the Deficit Commission would achieve at least 20 percent of the $4 trillion reduction. The Deficit Commission plan aims to reduce, if not eliminate, $1.1 trillion in tax expenditures in the current Tax Code for individuals and businesses. Under current law, the largest tax expenditure is the tax-free treatment of contributions to health care plans at approximately $144 billion per year.

Other substantial tax expenditures include:

•    $79 billion by disallowing portions of the home mortgage interest   deduction,
•    $57 billion by curtailing accelerated depreciation,
•    $53 billion by raising capital gains rates, and
•    $49 billion by tightening the availability of the earned income credit.

At the same time, the plan would reduce tax rates, the amount depending on the amount of tax expenditures eliminated.

Individual income tax rates. Under one scenario, the Deficit Commission's plan would provide three ordinary income tax rates as low as 8, 14, and 23 percent. The plan would treat capital gains and dividends as ordinary income, but, of course, ordinary income rates would be lower. The plan would eliminate the alternative minimum tax (AMT).

More "reforms." Other targeted reforms proposed by the Deficit Commission include:

•    Limiting the charitable deduction for individuals to amounts over two percent of adjusted gross income;
•    Repealing the state and local tax deduction for individuals;
•    Repealing all miscellaneous itemized deductions for individuals;
•    Capping the income tax exclusion for employer-provided health insurance; and
•    Raising the federal gasoline tax by 15 cents per gallon.

Corporate tax. The Deficit Commission plan would provide a single corporate tax rate of 26 percent, compared to the current maximum rate of 35 percent. Additional business-related reforms include eliminating the Code Sec. 199 domestic manufacturing deduction, the LIFO (last-in, first-out) method of accounting, and oil and gas production incentives.

TAX WRITING COMMITTEES

In tandem with deficit reduction proposals, the tax writing committees in Congress are exploring possible reforms to the Tax Code. The Senate Finance Committee, controlled by Democrats, and the House Ways and Means Committee, controlled by Republicans, have looked at a variety of issues related to individual and business taxation.

The Senate Finance Committee (SFC), under the leadership of Sen. Max Baucus, D-Mont., has held a series of hearings in recent months on tax reform. The SFC has examined, among other issues, oil and gas tax preferences, the tax treatment of business and household debt, strategies to increase the voluntary compliance rate to 90 percent, and efforts to close the tax gap.

The House Ways and Means Committee has also held a series of hearings on tax reform in recent months. The Ways and Means Committee has examined, among other issues, the advantages and disadvantages of a value added tax (VAT), tax incentives to encourage foreign investment in the U.S., and the corporate tax rate.

Please contact this office if you have any questions over how momentum toward deficit reduction and tax reform may impact your bottom line tax liability in the future.