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HOT TOPICS FEATURES:
- Tax Law Changes - Fiscal Cliff Legislation
- The New I-9 Form - See How It's Changed!
- Understanding Financial Statements
- Act 32 - Big Changes for PA Local Income Taxes
- New Rules Require Rental Property Owners to Issue 1099s
- New Health Care Tax Credits - Frequently Asked Questions
- Eight Facts about the New Vehicle Sales and Excise Tax Deduction
- American Opportunity Tax Credit At A Glance
- Employee vs. Independent Contractor - Ten Tips For Business Owner
- Keeping Good Records Reduces Stress at Tax Time
- The Latest on Federal and Pennsylvania Employee Assistance
Provisions relating to increased earned income tax credit amounts for families with three or more children are extended through 2017
American Opportunity credit provisions relating to maximum credit amount, refundability, and phaseout limits are extended through 2017
The $250 above-the-line tax deduction for educator classroom expenses, the limited ability to deduct mortgage insurance premiums as qualified residence interest, the ability to deduct state and local sales tax in lieu of the itemized deduction for state and local income tax, and the deduction for qualified higher education expenses are all extended through 2013
Charitable IRA distributions (IRA holders over age 70½ are able to exclude from income up to $100,000 in qualified distributions made to charitable organizations) are extended through 2013; special rules apply for the 2012 tax year
Exclusion of qualified mortgage debt forgiveness from income provisions extended through 2013
Exclusion of 100% of the capital gain from the sale of qualified small business stock extended to apply to stock acquired before January 1, 2014
50% bonus depreciation and expanded Section 179 expense limits extended through 2013
Phaseout or limitation of itemized deductions and personal exemptions
In the past, itemized deductions and personal and dependency exemptions were phased out or limited for high-income individuals. Since 2010, neither itemized deductions nor personal and dependency exemptions have been subject to phaseout or limitation based on income, but those provisions expired at the end of 2012.
The new legislation provides that, beginning in 2013, personal and dependency exemptions will be phased out for those with incomes exceeding specified income thresholds. Similarly, itemized deductions will be limited. For both the personal and dependency exemptions phaseout and the itemized deduction limitation, the threshold is $250,000 for single individuals ($300,000 for married individuals filing joint federal income tax returns).
"Marriage penalty" relief in the form of an increased standard deduction amount for married couples and expanded 15% federal income tax bracket.
Expanded tax credit provisions relating to the dependent care tax credit, the adoption tax credit, and the child tax credit
Higher limits and more generous rules of application relating to certain education provisions, including Coverdell education savings accounts, employer-provided education assistance, and the student loan interest deduction
The Act makes permanent the $5 million exemption amounts (indexed for inflation) for the estate tax, the gift tax, and the generation-skipping transfer tax--the same exemptions that were in effect for 2011 and 2012. The top tax rate, however, is increased to 40% (up from 35%) beginning in 2013.
The Act also permanently extends the "portability" provision in effect for 2011 and 2012 that allows the executor of a deceased individual's estate to transfer any unused exemption amount to the individual's surviving spouse.
The AMT is essentially a parallel federal income tax system with its own rates and rules. The last temporary AMT "patch" expired at the end of 2011, threatening to dramatically increase the number of individuals subject to the AMT for 2012. The American Taxpayer Relief Act permanently extends AMT relief, retroactively increasing the AMT exemption amounts for 2012, and providing that the exemption amounts will be indexed for inflation in future years. The Act also permanently extends provisions that allowed nonrefundable personal income tax credits to be used to offset AMT liability.
2012 AMT Exemption Amounts
Married filing jointly
Married filing separately
Capital gainsGenerally, lower tax rates that applied to long-term capital gain and qualifying dividends have been permanently extended for most individuals as well. If you're in the 10% or 15% marginal income tax bracket, a special 0% rate generally applies. If you are in the 25%, 28%, 33%, or 35% tax brackets, a 15% maximum rate will generally apply. Beginning in 2013, however, those who pay tax at the higher 39.6% federal income tax rate (i.e., individuals with income that exceeds $400,000, or married couples filing jointly with income that exceeds $450,000) will be subject to a maximum rate of 20% for long-term capital gain and qualifying dividends.
On March 8, 2013 the Department of Homeland Security released an updated I-9 form. All newly hired employees must complete Form I-9 and all employers are required to maintain the I-9 forms on file for their current employees.
The new form should be put into
use right away.
Instructions must be included when providing the
form to an employee for completion.
The New form is 10 pages
long, 6 of which are instructions and guidelines.
To access it here, click on this link:
New I-9 Form
The New form is 10 pages long, 6 of which are instructions and guidelines. To access it here, click on this link: New I-9 Form
In 2008 PA passed a new law, Act 32, for all local income taxes. The new law provides for a Tax Collection District for each county, except Allegheny County which has 4 tax collection districts (TCDs). The City and County of Philadelphia is exempt from Act 32.This new law has been implemented in several eastern counties for 2011, but will be applicable in all of Pennsylvania as of January 1, 2012.The new law is meant to standardize local income tax collection and reporting.
What the new law will mean to you as an employer:
- A Certificate of Residency is required from each employee. This will define the appropriate local tax for the employee.
- Local income
tax withholding is required for
every PA employee. The rate of withholding is
determined based on the certificate
of residency. If the employer location has
a higher rate for nonresidents
than the employee's residential rate,
the higher rate must be withheld. Please see the following
Employer is located
in Braddock Boro
with a nonresident
earned income tax
rate of 1.05%.Employees
working at the
have residences in
City of Greater Pittsburgh,
West Deer Township
and Boro of Plum.
- For the employees residing in West Deer and Plum, the nonresident withholding should be the 1.05% of Braddock. This is because West Deer and Plum Boro both have a 1% local income tax rate. Where the nonresident rate is different than the residential rate, the higher rate must be withheld.
- For the employee residing in the City of Greater Pittsburgh, withholding must be at the 3% (1% city withholding and 2% school withholding tax.)In this case the higher rate is the residential rate for the City of Greater Pittsburgh.
- A Braddock Boro resident working in Braddock Boro is only subject to the Braddock resident rate---NOT the nonresident rate.
- Employer is located in Braddock Boro with a nonresident earned income tax rate of 1.05%.Employees working at the Braddock location have residences in City of Greater Pittsburgh, West Deer Township and Boro of Plum.
- Registration with your tax collection district is necessary prior to January 1, 2012
- Disregard of the new rules will subject the employer to payment of the proper withholding amounts subject to penalty and interest. Civil and criminal penalties are applicable for disregard of the new law.
- Determination of how many tax collection districts you are in based on your employees' residences for quarterly reporting OR reporting and payment monthly of the local withholding based on the employer's tax collection district. Please see the following examples:
- Employer in Allegheny County has employees from Westmoreland, Butler and Allegheny counties. Employer must register with each tax district collector (by county) to report the withholding on a quarterly basis.
- Employer in Allegheny County has employees from Westmoreland, Butler and Allegheny counties. Employer chooses to pay withholding monthly electronically to the tax district collector for Allegheny County. No further responsibility for reporting to Butler or Westmoreland Counties.
- Confirm that any payroll provider utilized will make the appropriate adjustments to properly deduct, report and pay the local income taxes.
What the new law will mean to you as an employee:
- You will be required to complete a Certificate of Residency for your employer. A new certificate is necessary any time you move or otherwise change your address.
- If local income taxes are not deducted from your payroll currently, local income taxes will begin as deductions in your first check after January 1, 2012.This deduction means you will have a reduced take home pay (assuming all other tax deductions remain the same.)
- If you currently pay your local taxes by quarterly estimated taxes because your employer did not withhold local income taxes, you will no longer need to make the estimated payments (if your only income is wages.)
- If you are self-employed or have other sources of earned income beside wages, you will continue to make quarterly estimated payments for local income taxes.
- Note that if the locality of your employer's location has a non-resident local tax rate higher than the tax rate for your residence, the higher tax rate will be deducted from your paycheck. This higher rate will provide full credit to your residence local tax rate, with the balance retained by the local taxing authority for the address of your employer.
The links below provide additional information and forms for implementing the new law.
Certificate of Residency http://www.newpa.com/webfm_send/1862
Interactive map of counties and districts:Go to http://www.dced.state.pa.us/EITMap/
Use this website to access PSD (political subdivisions) codes http://www.newpa.com/get-local-gov-support/tax-information/dceds-act-32-eit-collection-system
PSD codes are required to identify the county and tax collection district (TCD) for each employee's local withholding.
The same website referenced above includes all the information regarding the political subdivisions local income tax rates. http://munstatspa.dced.state.pa.us/MunicipalTaxInfo.aspx
Not all localities have a nonresident rate.For the localities that have a nonresident rate, it will be listed.The employer is charged with the responsibility of determining and withholding the correct amount of local income tax for each employee.
For questions or additional help, please contact Debra Shutak at our office.We will gladly assist with registration, forms or questions.Our payroll services provide customized responses to your needs.If the new law's requirements make you uncomfortable or uncertain as to the adequacy of your payroll procedures or practices, call us today to insure that your procedures will be compliant with the new regulations.
We offer a wide array of payroll services…..one of them is a perfect fit for your needs. Call us today.
(Journal of Accountancy)
The recently enacted Small Business Jobs Act contained one provision that may have escaped the notice of taxpayers who own rental property, but will affect them starting in January. Under the provision, owners of property who receive rental income will be required to issue Forms 1099 to service providers for payments of $600 or more during the year.
The act subjects recipients of rental income from real estate to the same information-reporting requirements as taxpayers engaged in a trade or business. Thus, rental income recipients making payments of $600 or more to a service provider in the course of earning rental income are required to provide an information return (typically, Form 1099-MISC, Miscellaneous Income) to the IRS and to the service provider. This provision will apply to payments made after Dec. 31, 2010, and will cover, for example, payments made to plumbers, painters or accountants in the course of earning the rental income.
While rental property owners will not actually issue the required 1099s until early 2012, they need to start keeping adequate records of payments starting Jan. 1, 2011, so they will be prepared to issue correct 1099s. They will also need to obtain the name, address and taxpayer identification number of the service provider, using Form W-9 or a similar form.
The law provides exceptions for individuals who can show that the requirement will create a hardship for them. The IRS is directed to issue regulations on this, but has not done so yet, so there is currently no guidance on what constitutes sufficient hardship to qualify for the exception or how a taxpayer would demonstrate that hardship.
The law also contains an exception for individuals who receive rental income of "not more than a minimal amount." Again, the IRS is directed to issue regulations to determine what constitutes "not more than a minimal amount" but has not done so yet.
If such guidance is not forthcoming before Jan.1, all individuals who receive rental income should start keeping records of payments to service providers so they are prepared to issue 1099s in 2012.
The law also contains an exception for members of the military or employees of the intelligence community if substantially all their rental income comes from renting their principal residence on a temporary basis.
Information Return Penalties
Taxpayers should also be aware that in addition to creating a new reporting requirement, the act increases the penalties for failure to file a correct information return. The first-tier penalty increases from $15 to $30; the second-tier penalty increases from $30 to $60; and the third-tier penalty increases from $50 to $100. For small business filers (with average annual gross receipts under $5 million), the calendar-year maximum increases from $25,000 to $75,000 for the first-tier penalty; from $50,000 to $200,000 for the second-tier penalty; and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard increases from $100 to $250.
The increased penalties apply to information returns required to be filed on or after Jan. 1, 2011.
Expanded 1099 Reporting After 2011
Currently, payments to corporations are excepted from the 1099 information reporting requirements, but starting for payments after Dec. 31, 2011, businesses (including, now, individuals who receive rental income) will be required to file an information return for all payments aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation). This change was made by the Patient Protection and Affordable Care Act, which was enacted in March. That act also expanded the information reporting requirements to include gross proceeds paid in consideration for property.
This new expanded 1099 reporting is currently being debated in Congress and may be repealed.
Frequently Asked Questions
The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010. The following questions and answers provide information on the credit as it applies for 2010-2013, including information on transition relief for 2010. An enhanced version of the credit will be effective beginning in 2014. The new law, the Patient Protection and Affordable Care Act, was passed by Congress and was signed by President Obama on March 23, 2010.
Employers Eligible for the Credit
1. Which employers are eligible for the small employer health care tax credit?
A. Small employers that provide health care coverage to their employees and that meet certain requirements ("qualified employers") generally are eligible for a Federal income tax credit for health insurance premiums they pay for certain employees. In order to be a qualified employer, (1) the employer must have fewer than 25 full-time equivalent employees ("FTEs") for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a "qualifying arrangement" described in Q/A-3. See Q/A-9 through 15 for further information on calculating FTEs and average annual wages and see Q/A-22 for information on anticipated transition relief for tax years beginning in 2010 with respect to the requirements for a qualifying arrangement.
2. Can a tax-exempt organization be a qualified employer?
A. Yes. The same definition of qualified
employer applies to an organization described in
Code section 501(c) that is exempt from tax under
Code section 501(a). However, special rules
apply in calculating the credit for a tax-exempt
qualified employer. See Q/A-6.
Calculation of the Credit
3. What expenses are counted in calculating the credit?
A. Only premiums paid by the employer under an
arrangement meeting certain requirements (a
"qualifying arrangement") are counted in calculating
the credit. Under a qualifying arrangement,
the employer pays premiums for each employee
enrolled in health care coverage offered by the
employer in an amount equal to a uniform percentage
(not less than 50 percent) of the premium cost of
the coverage. See Q/A-22 for information on
transition relief for tax years beginning in 2010
with respect to the requirements for a qualifying
If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement (with employees paying the rest), the amount of premiums counted in calculating the credit is only the portion paid by the employer. For example, if an employer pays 80 percent of the premiums for employees' coverage (with employees paying the other 20 percent), the 80 percent premium amount paid by the employer counts in calculating the credit. For purposes of the credit (including the 50-percent requirement), any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer.
In addition, the amount of an employer's premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the State (or an area within the State) in which the employer offers coverage were substituted for the actual premium. If the employer pays only a portion of the premium for the coverage provided to employees (for example, under the terms of the plan the employer pays 80 percent of the premiums and the employees pay the other 20 percent), the premium amount that counts for purposes of the credit is the same portion (80 percent in the example) of the premiums that would have been paid for the coverage if the average premium for the small group market in the State were substituted for the actual premium.
4. What is the average premium for the small group market in a State (or an area within the State)?
A. The average premium for the small group market in a State (or an area within the State) will be determined by the Department of Health and Human Services (HHS) and published by the IRS. Publication of the average premium for the small group market on a State-by-State basis is expected to be posted on the IRS website by the end of April.
5. What is the maximum credit for a qualified employer (other than a tax-exempt employer)?
A. For tax years beginning in 2010 through
2013, the maximum credit is 35 percent of the
employer's premium expenses that count towards the
credit, as described in Q/A-3.
Example. For the 2010 tax year, a qualified employer has 9 FTEs with average annual wages of $23,000 per FTE. The employer pays $72,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit. The credit for 2010 equals $25,200 (35% x $72,000).
6. What is the maximum credit for a tax-exempt qualified employer?
A. For tax years beginning in 2010 through
2013, the maximum credit for a tax-exempt qualified
employer is 25 percent of the employer's premium
expenses that count towards the credit, as described
in Q/A-3. However, the amount of the credit
cannot exceed the total amount of income and
Medicare (i.e., Hospital Insurance) tax the employer
is required to withhold from employees' wages for
the year and the employer share of Medicare tax on
Example. For the 2010 tax year, a qualified tax-exempt employer has 10 FTEs with average annual wages of $21,000 per FTE. The employer pays $80,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit. The total amount of the employer's income tax and Medicare tax withholding plus the employer's share of the Medicare tax equals $30,000 in 2010.
The credit is calculated as follows:
(1) Initial amount of credit determined before any
reduction: (25% x $80,000) = $20,000
(2) Employer's withholding and Medicare taxes: $30,000
(3) Total 2010 tax credit is $20,000 (the lesser of $20,000 and $30,000).
7. How is the credit reduced if the number of FTEs exceeds 10 or average annual wages exceed $25,000?
A. If the number of FTEs exceeds 10 or if
average annual wages exceed $25,000, the amount of
the credit is reduced as follows (but not below
zero). If the number of FTEs exceeds 10, the
reduction is determined by multiplying the otherwise
applicable credit amount by a fraction, the
numerator of which is the number of FTEs in excess
of 10 and the denominator of which is 15. If
average annual wages exceed $25,000, the reduction
is determined by multiplying the otherwise
applicable credit amount by a fraction, the
numerator of which is the amount by which average
annual wages exceed $25,000 and the denominator of
which is $25,000. In both cases, the result of
the calculation is subtracted from the otherwise
applicable credit to determine the credit to which
the employer is entitled. For an employer with
both more than 10 FTEs and average annual wages
exceeding $25,000, the reduction is the sum of the
amount of the two reductions. This sum may
reduce the credit to zero for some employers with
fewer than 25 FTEs and average annual wages of less
Example. For the 2010 tax year, a qualified employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit.
The credit is calculated as follows:
(1) Initial amount of credit determined before any
reduction: (35% x $96,000) = $33,600
(2) Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480
(3) Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720
(4) Total credit reduction: ($4,480 + $6,720) = $11,200
(5) Total 2010 tax credit: ($33,600 - $11,200) = $22,400.
8. Can premiums paid by the employer in 2010, but before the new health reform legislation was enacted, be counted in calculating the credit?
A. Yes. In computing the credit for a
tax year beginning in 2010, employers may count all
premiums described in Q/A-3 for that tax year.
Determining FTEs and Average Annual Wages
9. How is the number of FTEs determined for purposes of the credit?
A. The number of an employer's FTEs is
determined by dividing (1) the total hours for which
the employer pays wages to employees during the year
(but not more than 2,080 hours for any employee) by
(2) 2,080. The result, if not a whole number,
is then rounded to the next lowest whole number.
See Q/A-12 through 14 for information on which
employees are not counted for purposes of
Example. For the 2010 tax year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours.
The employer's FTEs would be calculated as follows:
(1) Total hours not exceeding 2,080 per employee is the sum of:
a. 10,400 hours for the 5 employees paid for 2,080 hours each (5 x 2,080)
b. 3,120 hours for the 3 employees paid for 1,040 hours each (3 x 1,040)
c. 2,080 hours for the 1 employee paid for 2,300 hours (lesser of 2,300 and 2,080)
These add up to 15,600 hours
(2) FTEs: 7 (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number)
10. How is the amount of average annual wages determined?
A. The amount of average annual wages is
determined by first dividing (1) the total wages
paid by the employer to employees during the
employer's tax year by (2) the number of the
employer's FTEs for the year. The result is
then rounded down to the nearest $1,000 (if not
otherwise a multiple of $1,000). For this
purpose, wages means wages as defined for FICA
purposes (without regard to the wage base
limitation). See Q/A-12 through 14 for
information on which employees are not counted as
employees for purposes of determining the amount of
average annual wages.
Example: For the 2010 tax year, an employer pays $224,000 in wages and has 10 FTEs.
The employer's average annual wages would be: $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000)
11. Can an employer with 25 or more employees qualify for the credit if some of its employees are part-time?
A. Yes. Because the limitation on the number of employees is based on FTEs, an employer with 25 or more employees could qualify for the credit if some of its employees work part-time. For example, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and therefore may qualify for the credit.
12. Are seasonal workers counted in determining the number of FTEs and the amount of average annual wages?
A. Generally, no. Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year.
13. If an owner of a business also provides services to it, does the owner count as an employee?
A. Generally, no. A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit. Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.
14. Do family members of a business owner who work for the business count as employees?
A. Generally, no. A family member of any of the business owners or partners listed in Q/A-13, or a member of such a business owner's or partner's household, is not considered an employee for purposes of the credit. Thus, neither their wages nor their hours are counted in determining the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit. For this purpose, a family member is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a step-parent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.
15. How is eligibility for the credit determined if the employer is a member of a controlled group or an affiliated service group?
A. Members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses of which one performs services for the other) are treated as a single employer for purposes of the credit. Thus, for example, all employees of the controlled group or affiliated service group, and all wages paid to employees by the controlled group or affiliated service group, are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer. Rules for determining whether an employer is a member of a controlled group or an affiliated service group are provided under Code section 414(b), (c), (m), and (o).
How to Claim the Credit
16. How does an employer claim the credit?
A. The credit is claimed on the employer's annual income tax return. For a tax-exempt employer, the IRS will provide further information on how to claim the credit.
17. Can an employer (other than a tax-exempt employer) claim the credit if it has no taxable income for the year?
A. Generally, no. Except in the case of a tax-exempt employer, the credit for a year offsets only an employer's actual income tax liability (or alternative minimum tax liability) for the year. However, as a general business credit, an unused credit amount can generally be carried back one year and carried forward 20 years. Because an unused credit amount cannot be carried back to a year before the effective date of the credit, though, an unused credit amount for 2010 can only be carried forward.
18. Can a tax-exempt employer claim the credit if it has no taxable income for the year?
A. Yes. For a tax-exempt employer, the credit is a refundable credit, so that even if the employer has no taxable income, the employer may receive a refund (so long as it does not exceed the income tax withholding and Medicare tax liability, as discussed in Q/A-6).
19. Can the credit be reflected in determining estimated tax payments for a year?
A. Yes. The credit can be reflected in determining estimated tax payments for the year to which the credit applies in accordance with regular estimated tax rules.
20. Does taking the credit affect an employer's deduction for health insurance premiums?
A. Yes. In determining the employer's deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.
21. May an employer reduce employment tax payments (i.e., withheld income tax, social security tax, and Medicare tax) during the year in anticipation of the credit?
A. No. The credit applies against income
tax, not employment taxes.
Anticipated Transition Relief for Tax Years Beginning in 2010
22. Is it expected that any transition relief will be provided for tax years beginning in 2010 to make it easier for taxpayers to meet the requirements for a qualifying arrangement?
A. Yes. The IRS and Treasury intend to
issue guidance that will provide that, for tax years
beginning in 2010, the following transition relief
applies with respect to the requirements for a
qualifying arrangement described in Q/A-3:
(a) An employer that pays at least 50% of the premium for each employee enrolled in coverage offered to employees by the employer will not fail to maintain a qualifying arrangement merely because the employer does not pay a uniform percentage of the premium for each such employee. Accordingly, if the employer otherwise satisfies the requirements for the credit described above, it will qualify for the credit even though the percentage of the premium it pays is not uniform for all such employees.
(b) The requirement that the employer pay at least 50% of the premium for an employee applies to the premium for single (employee-only) coverage for the employee. Therefore, if the employee is receiving single coverage, the employer satisfies the 50% requirement with respect to the employee if it pays at least 50% of the premium for that coverage. If the employee is receiving coverage that is more expensive than single coverage (such as family or self-plus-one coverage), the employer satisfies the 50% requirement with respect to the employee if the employer pays an amount of the premium for such coverage that is no less than 50% of the premium for single coverage for that employee (even if it is less than 50% of the premium for the coverage the employee is actually receiving).
There are many other specific rules and guidelines. This is a brief outline of the new legislation. If you have any questions, please contact our office.
(IRS Tax Tip 2010-26)
If you bought a new vehicle in 2009, you may be entitled to a special tax deduction for the sales and excise taxes on your purchase.
Here are eight important facts the Internal Revenue Service wants you to know about this deduction.
State and local sales and excise taxes paid on up to $49,500 of the purchase price of each qualifying vehicle are deductible.
Qualified motor vehicles generally include new cars, light trucks, motor homes and motorcycles.
To qualify for the deduction, the new cars, light trucks and motorcycles must weigh 8,500 pounds or less. New motor homes are not subject to the weight limit.
Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.
Purchases made in states without a sales tax—such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon—may also qualify for the deduction. Taxpayers in these states may be entitled to deduct other qualifying fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle's sales price or as a per unit fee.
This deduction can be taken regardless of whether the buyers itemize their deductions or choose the standard deduction. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return.
The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.
Taxpayers who do not itemize must complete Schedule L, Standard Deduction for Certain Filers to claim the deduction.
For more information about these rules and other eligibility requirements visit IRS.gov/recovery.
· In 2009 and 2010, tax credit of up to $2,500 of the out-of-pocket cost of tuition and related expenses including course materials paid during the taxable year
· Eligible for the first four years of college
· 100% of the first $2,000 and 25% of the next $2,000
· 40% of the credit is refundable with the maximum refundable amount of $1,000
Phase-out for taxpayers with adjusted gross income in excess of
$80,000 or $160,000 for married
couples filing jointly (AGI phase out limits are $90,000 individual, $180,000 married couples filing jointly)
Required course materials have been defined by the IRS in other educational tax benefit programs as including books, supplies, and equipment that are required for the courses at the eligible educational institution.
Q1. Are there any changes to the tax credits for college expenses?
A. The American opportunity tax credit, which expanded and renamed the already-existing Hope credit, can be claimed for tuition and certain fees you pay for higher education in 2009 and 2010.
Q2. The Hope credit originally applied only to the first two years of college. Has that changed?
A. Yes. The American opportunity tax credit can be claimed for expenses for the first four years of post-secondary education.
Q3. How much is the American opportunity tax credit worth?
A. It is a tax credit of up to $2,500 of the cost of qualified tuition and related expenses paid during the taxable year. That is a $700 increase from the previous Hope credit.
Q4. What education expenses qualify for the American opportunity tax credit?
A. The term "qualified tuition and related expenses" has been expanded to include expenditures for "course materials." For this purpose, the term "course materials" means books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.
Q5. Does an expenditure for a computer qualify for the American opportunity tax credit?
A. Whether an expenditure for a computer qualifies for the credit depends on the facts. An expenditure for a computer would qualify for the credit if the computer is needed for enrollment or attendance at the educational institution.
Q6. How is the American opportunity tax credit calculated?
A. 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.
Q7. How will the American opportunity tax credit affect my income tax return?
A. You will be able to reduce your tax liability one dollar for each dollar of credit for which you're eligible. If the amount of the American opportunity tax credit for which you're eligible is more than your tax liability, the amount of the credit that is more than your tax liability is refundable to you, up to a maximum refund of 40 percent of the amount of the credit for which you’re eligible.
Q8. Who is eligible for the American opportunity tax credit?
A. A taxpayer who pays qualified tuition and related expenses and whose federal income tax return has a modified adjusted gross income of $80,000 or less ($160,000 or less for joint filers) is eligible for the credit. The credit is reduced ratably if a taxpayer’s modified adjusted gross income exceeds those amounts. A taxpayer whose modified adjusted gross income is greater than $90,000 ($180,000 for joint filers) cannot benefit from this credit.
Q9. What is "modified adjusted gross income" for the purposes of the American opportunity tax credit?
A. It is the taxpayer's adjusted gross income increased by foreign income that was excluded, and by income excluded from sources in Puerto Rico or certain U.S. possessions.
Q10. How is the credit claimed?
A. The credit is claimed using Form 8863, attached to Form 1040 or 1040A.
Q11. I'm just beginning college this year. Can I claim the American opportunity tax credit for all four years I pay tuition?
A. The American opportunity tax credit is for amounts paid in 2009 and 2010 only. You may be eligible for the lifetime learning credit for any tuition and fees required for enrollment you pay after 2010.
Q12. Can I also claim the tuition and fees tax deduction in addition to claiming the American opportunity tax credit?
A. No. You cannot claim the tuition and fees tax deduction in the same year that you claim the American opportunity tax credit or the lifetime learning credit. You must choose among them. You also cannot claim the tuition and fees tax deduction if anyone else claims the American opportunity tax credit or the lifetime learning credit for you in the same year. A tax deduction of up to $4,000 can be claimed for qualified tuition and fees paid. Though the credit will usually result in greater tax savings, taxpayers should calculate the effect of both on the tax return to see which is most beneficial — the tax credit or the deduction. Often tax software will automatically compare the two for you.
Q13. Is there a new benefit that applies to college savings plans (commonly known as 529 Plans)?
A. Yes. A qualified, nontaxable distribution from a Section 529 plan during 2009 or 2010 now includes the cost of the purchase of any computer technology or equipment or Internet access and related services, if such technology, equipment or services are to be used by the beneficiary of the plan and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.
American Opportunity Tax Credit
Under the American Recovery and Reinvestment Act (ARRA) signed into law by President Obama on February 17, 2009, textbook and other course material expenses incurred in 2009 and 2010 that are not covered by scholarship or grant aid may be counted towards the newly created tax credit called the American Opportunity Tax Credit on that year’s tax return.
According to the IRS, the new credit temporarily replaces and expands the previous Hope Credit for tax years 2009 and 2010, making the American Opportunity Tax Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax.
- Adds required course materials to the list of qualifying expenses
- Allows the credit to be claimed for the first four post-secondary education years instead of two
Many of those eligible will qualify for the maximum annual credit of $2,500 per student, which is more than $700 higher than the old Hope Credit, and, for the first time, will provide a partial refund of up to $1,000.
If you or your student has out-of-pocket course material expenses or tuition and fees during 2009 or 2010 and no other financial grant aid covers those expenses, you will be able to claim the expenses as a credit. For each student the credit is limited to $2,500.
Let’s say your federal tax liability for 2009 is $2,000 before the American Opportunity Tax Credit and your student had $5,000 in allowable higher education expenses. The first $2,000 in out-of-pocket textbook purchases, tuition, and fees goes towards your tax credit at 100%. Everything over that is allowable at 25% up to a total credit per student of $2,500. You would have a credit of $2,000 plus $500 of the remaining $3,000 (25% of the expenses over $2,000 up to an extra $500 credit). Because this credit is partially refundable, the $2,500 credit results in a refund of $500! If your 2009 tax liability is zero and your student’s textbook credits were $2,500, you can receive a refund of $1,000 because the credit is 40% percent refundable (.40 x $2,500 = $1,000).
If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.
Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.
- Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.
- Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
- Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.
- The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
- If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
- If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.
- Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
- Workers can avoid higher tax bills and lost benefits if they know their proper status.
- Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.
- You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).
Taken from the IRS Tax Tips: Issue Number: Summertime Tax Tip 2009-20
Although most people won’t be filing their tax returns for several months, the dog days of summer are actually a great time to start planning for the tax filing season by ensuring your records are organized. Whether you are an individual taxpayer or a business owner, you can avoid headaches at tax time with good records because they will help you remember transactions you made during the year.
Here are a few things the IRS wants you to know about recordkeeping.
Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you are billed for additional tax. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.
Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:
- Credit card and other receipts
- Mileage logs
- Canceled, imaged or substitute checks or any other proof of payment
- Any other records to support deductions or credits you claim on your return
You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:
- A home purchase or improvement
- Stocks and other investments
- Individual Retirement Arrangement transactions
- Rental property records
If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:
- Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
- Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
- Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
- Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks
For more information about recordkeeping, check out IRS Publications 552, Recordkeeping for Individuals, 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Taken from the IRS Tax Tips: Issue Number: Summertime Tax Tip 2009-23
The Latest on Federal and Pennsylvania Employee Assistance:
Federal Employee Assistance for Health Coverage—20 or more Employees:
- Originally only applied to employers with 20 or more full time equivalent employees:
- For Employees Laid Off or Involuntarily Terminated from September 1, 2008 through December 31, 2009
- Premiums eligible for assistance after February 17, 2009
- Employee pays 35% of insurance premium to employer for insurance coverage
- Employer pays the balance of the health insurance premium, 65% to the insurance carrier and deducts that amount from next 941 deposit
- Premium Assistance is available for nine months maximum with ineligibility if the beneficiary obtains other coverage
- Premium Assistance may increase the beneficiary’s income tax at the end of the year if income limits are exceeded; The limits are earned Income of $125,000 for a single filer and $250,000 for married filing joint returns
coverage must extend 18 months for most
participants. Remember the Premium
Assistance is for 9 months only.
Employee Assistance—2 to 19 employees:
- Same requirements, except premium assistance eligibility is based on termination date of July 10, 2009 through December 31, 2009
- Premiums eligible for assistance after July 10, 2009
- Employee pays 35%of insurance premium to employer; employer pays that amount to insurance company
- INSURANCE CO makes up the 65% balance of the health coverage premium and deducts that amount from next 941 deposit. (The employer does not front the money for the health care coverage.)
- COBRA benefits and premium assistance are available for nine months.
Both of these programs have stringent administration and legal notice requirements. The above information presents the broadest view of the programs. There are significant details, exceptions and special circumstances that may affect the information and its applications as presented above.