Tax Changes for 2011

After many years of tax changes, 2011 has very few. 2012, however, could be the year of significant changes to the tax law, both for personal and business. Most of the 2011 changes relate to inflation adjustments and exemption increases. Knowing in advance what type of changes are on the horizon makes it possible for the individuals who will be most affected by these changes to prepare in advance

Retirement Contributions. In 2011, 401(k) elective deferrals remain at $16,500; for those age 50+ it’s $22,000; SEP and profit-sharing plan limit is $49,000. IRA contributions remain at $5,000 and $6,000 for the over 50 crowd. This 401(k) deferral will increase to $17,000 in 2012.
Social Security taxes. The employee social security tax rate has been reduced by two percentage points to 4.2 percent for one year (2011) up to the $110,100 limit.
Energy Credit – The Home Energy Tax Credit has been extended but limited to10% of improvements up to a maximum $500. It’s only $200 for windows and for wood heating systems maximum is $300. Anyone already over the maximum cannot qualify for any new tax credits.
Payroll Tax Reporting - In 2011 each employee social security portion was reduced by 2% reducing the employee rate from 6.2% to 4.2% (the employer’s portion remained at 6.2%). The payroll tax reduction applied to all workers who paid payroll taxes, regardless of income level. This was extended for 2 months and is expected to be extended throughout 2012.
Social Security Wage Base. The Social Security Administration announced that the Social Security wage base for 2012 is $110,100 (up from $106,800 in 2011).

New For 2011

Stock basis reporting. Individual taxpayers should see more information on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, which has been expanded to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. Stockbrokers and mutual fund companies will use Form 1099-B to report this information at year-end. They will also use the expanded form to report whether gain or loss realized on these transactions qualifies as long-term or short-term gain or loss. Box 3 will show the cost or other basis of securities sold.
Foreign Asset Reporting. Individuals are required to report interests in specified foreign financial assets when filing their federal income tax returns. Taxpayers are required to File Form 8938, Statement of Specified Foreign Financial Assets.

Potential Expiring Tax breaks in 2012

The deduction of up to $250 for certain elementary and secondary school teacher expenses.
Deductibility of mortgage insurance premiums as interest.
The above-the-line deduction of up to $4,000 for qualified tuition and related expenses.
The tax-free treatment of charitable distributions from IRAs.
The nonbusiness energy property credit.
The $1,000 child tax credit amount (previously scheduled to revert to $500 after 2010) and the expanded refundability of the credit.
The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one)
Tax rates. The Bush tax cuts expire at the end of 2012. The 10% rate would disappear (with income in that bracket reverting to the 15% bracket) and the other rates would revert to 28%, 31%, 36% and 39.6%.
Capital gains. The capital gain tax rate of 15% (0% for taxpayers in the 10% and 15% ordinary income tax brackets) expire after 2011 and increase to 20% in 2013.
Itemized deductions and personal exemptions. The itemized deduction and personal exemption phase out for certain income levels will discontinue in 2013.

New Taxes for 2013

Plan for the added Medicare tax. Higher-income earners in 2013 will have a new 3.8 percent Medicare tax is slated for collection on profits from the sale of investment property. This includes capital gains, dividends, interest payments and, for those who own rental property, net rental income. The tax will apply to individuals with a gross income of $200,000 or more or married couples filing jointly with a combined gross income of $250,000 or more.

Medical Expenses. In 2013, the threshold to deduct unreimbursed medical expenses will increase to 10%, from 7.5% of your Adjusted Gross income (AGI).

Business Income Tax Changes for 2011-12

Credit card transactions. Beginning with calendar year 2011, payment settlement entities for traditional and online merchants will be required to report to a payee, as well as to the IRS, the gross amount of the payee’s reportable payment transactions within a calendar year. The payee is the party that accepts a payment card as payment or establishes an account with a third-party settlement organization to settle transactions. In a payment card transaction, the payee is generally the merchant or seller. These payments are reported on Form 1099-K, Merchant Card and Third Party Network Payments, which may be furnished electronically.

1099 Reporting. Every major tax form asks if you were required to send out 1099’s and of you did. This is an attempt to catch under reported income and put independent contractors on the books as W2 employees.

Self-Employment / Social Security Tax Base. The maximum amount of self-employment income or wages subject to Social Security taxes has increased to $110,100 for 2012.

Business Standard Mileage Rate Increased. The 2011 standard business mileage rate was 51.5 cents per mile through June 30 and 55.5 cents per mile through December 31 and will continue at 55.5 cents in 2012. As a result, it may be advantageous to take mileage instead of deducting actual expenses. Remember that you can deduct the cost of parking and tolls in addition to the mileage allowance.

NYS Wage & Theft Act. All employers have to provide notice to employees of their rate(s) of pay, intent to claim allowances (tip or meal) as part of minimum wage and basis of wage payment (hourly, shift, day, week, piece, etc.) on or before February 1 of each year and within 7 days of a change if the change is not listed on the following pay stub. We have posted sample templates on our website and well as a FAQ from NYS.

Health Care Act Reporting. Employers must disclose on each employee’s annual Form W-2 the value of the employee’s health insurance coverage sponsored by the employer. This is optional for 2011, but required for 2012. It will appear in box 12 of the W-2, with a code DD. This reporting is strictly informational; the amount reported will not affect the individual’s tax liability.

?Tax Changes for 2010

There are very few changes for 2010. Here is a summary of the tax changes.

Tax Credit for College Tuition

For 2010, the Hope credit is replaced by a new credit. Now called the American Opportunity Credit, it provides a credit of up to $2,500 per student per year for four years of college. It now also covers the cost of books, and begins to phase out at $80,000 of Adjusted Gross Income for single filers and $160,000 for joint filers. This was extended through 2012.

Cash Donations and Charitable Deductions

New record keeping You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution a bank record (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written communication from the charity. The written communication must include the name of the charity, date of the contribution, and amount of the contribution.
Donated clothing and household items must be in good condition to be allowed as a deduction.

INCREASING TAX AUDITS

Over the past few years we have seen a dramatic increase in the number of tax audits, particularly sales tax audits and now Department of Labor audits. We are concerned about these aggressive tactics. While you may think you are complying and paying the proper taxes, you may not be adhering to their recordkeeping requirements. New York State is also one of a number of states who is sharing the audit information directly with the IRS. As a result, a minor error can cost you thousands of dollars. Independent contractors are being scrutinized by the Department of Labor and results of audit are being shared with the IRS. Thus if any of your independent contractors are found to be subject to unemployment insurance, the IRS may find them subject to social security and withholding taxes. The DOL is counting payment of personal expenses from your corporations as payment of compensation. The difference is critical if you have a low wage or no wage at all.