2011 Tax Law Update:
As you can imagine, there are many tax law changes which came into effect during 2011. I have listed some
of the one that I believe our clients will be the most interested in. If you should have any specific questions, please feel
free to call me at our office.
Individuals:
Personal Exemptions: The personal exemption that taxpayers may claim on their tax
return for themselves and each dependent is $3,700.
Standard Deduction: For those taxpayers who are unable to itemize on their
tax return (Schedule A), the IRS standard deduction is $11,600 (Married), $5,800 (Single) and $8,500 (Head of Household).
IRS Warns
Taxpayers about Phony Emails: The IRS doesn't contact taxpayers by email to alert them of a pending tax refund. Do not respond
to these types of e-mails.
Child Tax Credit: (Same) Those taxpayers with dependent children under the age of 17 as of 12/31/11
will be eligible for a credit of up to $1,000 per child. This credit is scheduled to expire in 2012.
Educator's Credit: (Same) The credit for teachers' supplies remains the same as last year $250.
Student Loan Interest: (Same) The deduction
for student loan interest for 2011 will remain the same, up to $2,500 with certain phase out limits for higher income taxpayers.
Education
Credit: (Same) Taxpayers and their dependent children may be eligible for up to a $2,500 credit on their taxes for post
secondary education. Qualified expenses include tuition, books & some supplies.
Charitable Giving: (Same) Donations to charitable organizations are deductible. However, the IRS requires that at the time the tax return is filed the
taxpayer have a copy of the cancelled check and donor statement for any single donations in excess of $250.00. The IRS has disallowed
donations in which the taxpayer received their receipt after the tax return was already filed.
State Sales Tax Deduction: (Same) For those taxpayers who itemize, they will be able to deduct state sales tax paid. There is a chart provided by the IRS to compute
this amount. However, it is possible to add to this amount additional sales tax for car, boat, and planes. This provision
will expire in 2012.
Lower Capital Gains/Dividends Rates: (Same) The lower rates will remain in effect for 2011 and 2012.
Earned
income credit: (Same) Temporary increases in the Earned Income Tax Credit for filers with three or more children and the
higher income levels for the phase-out of the credit have been extended through the end of 2012.
Home improvement energy-saving credit: (Same) The 30% tax credit of energy saving home improvements was extended until 2011. Some of these improvements include:
· Central AC systems meeting certain SEER Ratings
· Home insulation meeting 2009 IECC criteria
· Roofs - Certain pigmented Metal roofs and some Asphalt meeting cooling granules
· Windows/Skylights
- must meet certain U factors
· Storm Windows/Doors - must meet certain U factors and SHGC/IECC
criteria
Retirement Saver's Credit: (Same) For individuals making contributions to their retirement plan with AGI
less than $56,500 (MFJ), $42,375 (HOH) and $28,250 (S), you would be eligible for a credit for the amount contributed.
Other
matters:
Making Work Pay Credit: (Expired) Last year everyone chuckled when they were informed that they received a credit
for holding down a day job. This credit ranged from $400 - $800. This year there will be no chuckling, the credit has
expired.
Mortgage Insurance Premiums (PMI): (Expired) Last year taxpayers were able to deduct these premiums as well as
their home mortgage interest on Schedule A. This provision expired in 2010.
Unemployment Benefits non-taxable: (Expired) In 2010 a portion of unemployment benefits received by taxpayers were non-taxable. In 2011 all benefits paid are fully taxable.
Tax
Relief for those homeowners who lose their home due to foreclosure: Starting in 2012, debt forgiven in connection with a foreclosure
of their principal residence will once again be considered taxable income. However, this may not apply for cases of insolvency
or bankruptcy.
Businesses- Unincorporated:
Health Insurance, not deductible for Self Employment Tax (SE Tax): Self
Employed health insurance is still deductible to the extent of your profits. However, the insurance premiums paid no longer
are deductible for the calculation of self-employment taxes.
Mileage Rates: The allowable mileage rates for 2011 include 51.5
cents/mile from 1/1-6/30/11, then it increases to 55 cents per mile from 7/1/11 - 12/31/11. This rate will remain in effect
for 2012.
Profit Motive/Hobby Losses: The IRS is cracking down on taxpayer businesses which continually have losses year after year. One of the IRS guidelines is that each business must have a profit motive. As a result to prove that an activity is a bona fide business, it should have a profit 3 out the past 5 years.
2011 Tax Law Update:
Corporate Clients:
Health insurance
reported on W-2: (New) Employers must report the value of health insurance coverage they provide to their employees on
the employee's W-2 form. This is pursuant to IRC Section 60501(a)(14). However, the IRS announced that they will not enforce
this provision for 2011 (IRS notice 2010-69)
Mileage Rates: The allowable mileage rates for 2011 include 51.5 cents/mile from
1/1-6/30/11, then it increases to 55 cents per mile from 7/1/11 - 12/31/11. This rate will remain in effect for 2012.
Profit
Motive/Hobby Losses: The IRS is cracking down on taxpayer businesses which continually have losses year after year. One
of the IRS guidelines is that each business must have a profit motive. As a result to prove that an activity is a bona fide
business, it should have a profit 3 out the past 5 years.
Officer Payroll (Reasonableness): The IRS has for many years required
that compensation in the form of W-2 wages be paid to officers of a corporation who perform services for the business. Often
times officers are not paid a W-2 wage with applicable payments for Social Security Taxes being taken out of their check. As
an alternative, they pay themselves a distribution which is reported to the officer at the end of the year on a K-1. However,
avoiding the payment through payroll, they have not paid in any social security or Medicare taxes.
Officer wages are reported directly
on the face of the corporate tax return. The IRS has begun selecting clients for audit in which there is a disproportionate
amount of wage paid to the officer in relation to distributions taken.
To avoid the increased likelihood of audit, Officers of S Corporations
should receive a reasonable compensation of the services they perform. A reasonable wage guide might be how much you would pay
someone to perform similar services. Or justification as why the officer is paid similar amount to other employees of the business.
Bank
Statements & Cancelled Checks: If you have ever participated in an IRS audit, you will know that they require that
you not only provide them with copies of your accounting records, but also copies of your Bank Statements and Cancelled Checks. The banks have recently told clients that they no longer provide copies of the checks, they are available on-line. However,
if you are audited 2 years down the road, these on-line check copies are difficult or impossible to obtain. Please....have the
bank send you copies of your checks along with your bank statement each month. If you bank will not do this, change banks.