Tax Law Changes for 2011 Federal Tax Returns

Tax Law Changes for 2011 Federal Tax Returns

Before you file your 2011 federal income tax return in 2012, you should be aware of a few important tax changes that took effect in 2011. Check www.IRS.gov before you file for updates on any new legislation that may affect your tax return.

Due date of return. File your federal tax return by April 17, 2012. The due date is April 17, instead of April 15, because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia.

New forms. In most cases, you must report your capital gains and losses on the new Form 8949, Sales and Other Dispositions of Capital Assets. Then, you report certain totals from that form on Schedule D (Form 1040). If you had foreign financial assets in 2011, you may have to file the new Form 8938, Statement of Foreign Financial Assets, with your return.

Standard mileage rates. The 2011 rates for mileage are different for January 1 through June 30 than for July 1 through December 31. For business use of your car, you can deduct 51 cents a mile for miles driven the first half of the year and 55 ½ cents for the second half. Medical and moving mileage are both 19 cents per mile for the early half of the year and 23 ½ cents in the latter half.

Standard deduction and exemptions increased. The standard deduction increased for some taxpayers who do not itemize deductions on IRS Schedule A (Form 1040). The amount depends on your filing status. The amount you can deduct for each exemption has increased $50 to $3,700 for 2011. Self-employed health insurance deduction. This deduction is no longer allowed on Schedule SE (Form 1040), but you can still take it on Form 1040, line 29.

Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount has increased to $48,450 ($74,450 if married filing jointly or a qualifying widow(er); $37,225 if married filing separately).

Health savings accounts (HSAs) and Archer MSAs. The additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses increased to 20 percent. Beginning in 2011, only prescribed drugs or insulin are qualified medical expenses.

Roth IRAs. If you converted or rolled over an amount from a traditional IRA to a Roth IRA or designated Roth in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return.

Alternative motor vehicle credit. You can claim the alternative motor vehicle credit for a 2011 purchase only if the vehicle is a new fuel cell motor vehicle.

First-time homebuyer credit. The credit expired for most taxpayers for 2011. Some military personnel and members of the intelligence community can still claim the credit in 2011 for qualified purchases.

Health coverage tax credit. Recent legislation changed the amount of this credit, which pays qualified health insurance premiums for eligible individuals and their families. Participants who received the 65 percent tax credit in any month from March to December 2011 may claim an additional 7.5 percent retroactive credit when they file their 2011 tax return.

Mailing a return. The IRS changed the filing location for several areas. If you're mailing a paper return, see the Form 1040 instructions for the correct address.

Detailed information on these changes can be found on the IRS website – www.irs.gov.

e-File Your Return and Choose Direct Deposit

We recommend that our clients e-File their return and if receiving a refund - choose direct deposit.

Their are at least three benefits to e-Filing your return . . .

First, you by-pass manual entry of your return and thus avoid data entry errors,

Second, e-Filing speeds up a refund, and

Third, and the greatest benefit - is that e-Filing ensures that the IRS gets y

our return and that you can prove their receipt by the electronic confirmation.

Safeguard Your Refund – Choose Direct Deposit

Direct deposit is the fastest, safest way to receive your tax refund. When a taxpayer combines e-file and direct deposit, the IRS says that it will likely issue your refund in as few

as 10 days (but more likely this year to be at least a week later).

Here are four reasons the IRS reports more than 79 million taxpayers chose direct deposit in 2011:

1. Security Thousands of paper checks are returned to the IRS by the U.S. Post Office every year as undeliverable mail. Direct deposit eliminates the possibility of your refund check being lost, stolen or returned to the IRS as undeliverable.

2. Convenience The money goes directly into your bank account. You won’t have to make a special trip to the bank to deposit the money yourself.

3. Ease When you’re preparing your return; simply follow the instructions on your return or in the tax software. Make sure you enter the correct bank account and bank routing numbers.

4. Options You can deposit your refund into multiple accounts. With the split refund option, taxpayers can divide their refunds among as many as three checking or saving

s accounts and up to three different U.S. financial institutions. Use IRS Form 8888, Allocation of Refund (Including Savings Bond Purchases), to divide your refund. A word of caution: Some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted. Additionally, Form 8888 should NOT be used to designate part of your refund to pay your tax preparer.

For more information about direct deposit of your tax refund and the split refund option, check the instructions for your tax form. Helpful tips are also available in IRS Publication 17, Your Federal Income Tax. To get a copy of Publication 17 or Form 8888, visit the IRS Forms and Publications section at the IRS.gov website or call 800-TAX-FORM (800-829-3676).

Links:

Form 8888, Allocation of Refund (Including Savings Bond Purchases)

IRS Publication 17, Your Federal Income Tax

When Can I Expect My Refund

Tax Tips for the Self-employed

Tax Tips for the Self-employed

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the you need to know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

For more information see the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

. . . . or call us for a personalized conference to discuss your business recordkeeping and tax requirements.

Links:

Publication 334, Tax Guide for Small Business

Publication 535, Business Expenses

Publication 505, Tax Withholding and Estimated Tax

Schedule C, Profit or Loss from Business and instructions

Schedule C-EZ, Net Profit from Business

Schedule SE, Self-Employment Tax and instructions

Form 1040-ES, Estimated Tax for Individuals

Pay Your Children for Business Chores

Pay Your Children for Business Chores I am astonished by how many business owners overlook the simple tax strategy of hiring their children. The benefits of the hiring vary by the type of tax return that you file, as you will see below. Did your under-age-18 children help you in your business this year? Did you pay them for their work? You should. Why? First, wages paid by the parent to the parent's under-age-18 child for work done in the parent's business are both1 deductible by the parent, and exempt from payroll taxes. Thus, if you operate your business as a proprietorship, you face no payroll taxes on the W-2 wages you pay your under-age-18 child. Second, your child can use the 2011 standard deduction to eliminate taxes on up to $5,800 in wages. Third, your child can contribute up to $5,000 to a tax-deductible IRA and exclude that amount from taxable wages. Example. Your child is age 14, and she has no earned income other than what she earns from you. You pay her $10,800 in fair market wages for work she actually does during the year. You deduct the $10,800 and pocket $4,320 because of your 40 percent tax bracket. Your daughter collects the $10,800 and pays zero federal income taxes because The IRA deduction removes $5,000 from taxable income, and The standard deduction removes $5,800 from taxable income. Your family unit has $4,320 in additional spendable cash. Key point. To avoid payroll taxes, the wages paid by the parent to the child must be on a W-2. If you use a 1099, you destroy payroll tax benefits because your recipient child will pay self-employment taxes on the 1099 income. Corporation or LLC. If a corporation does the hiring, both your corporation and your child face payroll taxes. The same is true with an LLC because the law treats the LLC as a corporation for payroll taxes. Paying payroll taxes is not a deal breaker for the strategy, but it does reduce the net family benefit. It is also a negative when considering the corporation or the multi-owner LLC as a possible choice of business entity. Ask me for an article titled "Big Tax Breaks for Hiring Your Child" written by Murray Bradford, CPA " for additional insights into this strategy. Planning note. The kiddie tax does not apply to the child's wages. The kiddie tax applies to unearned income, such as dividends, interest, rents, etc. ********************************* The real point is that good tax planning produces cash and builds net worth. In the example above, the family unit gained $4,320 in after-tax cash from hiring the child. If the child works for the parent for 10 years, the family unit gains $43,200 in after-cash, a nice addition to the investment or college-fund portfolio.

Do I Need to File a Tax Return This Year?

ed@EdSlovacekCPA.com

www.EdSlovacekCPA.com

979-846-4667

Do I Need to File a Tax Return This Year?

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, the Internal Revenue Service reminds taxpayers that 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, check the Individuals section of the IRS website at www.irs.gov or consult the instructions for Form 1040, 1040A or 1040EZ for specific details that may help you determine if you need to file a tax return with the IRS this year. You can also use the Interactive Tax Assistant available on the IRS website. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions.

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.

For more information about filing requirements and your eligibility to receive tax credits, give our office a call at (979) 846-4667 or email us at info@EdSlovacekCPA.com.

Voluntary Worker Classification Settlement Program

IRS Announces New Voluntary Worker Classification Settlement Program; Past Payroll Tax Relief Provided to Employers Who Reclassify Their Workers

The Internal Revenue Service today launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.

This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

This is part of a larger “Fresh Start” initiative at the IRS to help taxpayers and businesses address their tax responsibilities.

“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

To be eligible, an applicant must:

• Consistently have treated the workers in the past as nonemployees,
• Have filed all required Forms 1099 for the workers for the previous three years
• Not currently be under audit by the IRS
• Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

IRS and DOL Sharing Information on Independent Contractors

A Memorandum of Understanding (MOU) between the IRS and the United States Department of Labor (DOL) sets forth the agreement of the parties with respect to a joint initiative to improve compliance with laws and regulations administered by the IRS and DOL. The sharing of information and collaboration between the parties allowed by the MOU will help reduce the incidence of misclassification of employees as independent contractors, reduce abusive employment/unemployment tax schemes, and improve compliance with federal labor and tax laws.