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2011 Tax Relief: Bigger Paychecks!

September 26, 2011 By

Tax Relief: 2011 Paychecks Will Be Bigger…Eventually

The federal government is giving you a raise – that is, they are taking less out of your paycheck for social security, so the money you actually get from your paycheck will be more. The tax bill Congress recently enacted includes a reduction in the employee portion contributed to the social security fund from 6.2 percent to 4.2 percent. Your employer will still be paying their 6.2 percent. This is effectively replacing the Making Work Pay credit, a little known tax cut which essentially went unnoticed last tax season.

Reaping the benefits of this new tax cut does not require extra effort on your part, though, because you will see the change as part of your paycheck, and your employer will take care of the paperwork. The question, however, is when your employer will take care of the paperwork.

You may not see these changes right away because Congress did not exactly act swiftly in making sure employers new about this new bill. Employers were not alerted about the changes until the bill was officially enacted on December 17, 2010. Acknowledging their sometimes sloth-like pace, Congress decided to urge employers to adjust their withholding systems by January 31, 2010, so you should see a little higher paycheck come February. However, you may not see that money until April, since the IRS is merely urging employers to make changes as soon as possible, but not requiring the changes until March 31, 2011.

In other words, it will probably benefit you to inspect your 2011 paychecks to make sure your FICA contribution is lower. If you see nothing by April, it will be important to talk to your employer about the missing changes.

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IRS Removes Controversial Two Year Limitation on Innocent Spouse Relief

August 23, 2011 By

The IRS has made a historic removal of a two year limitation rule the Innocent Spouse Relief starting July 2011. This removal of the 2-year rule applies for most qualifying taxpayers seeking to get protection under the relief. Prior to this tax code change, those seeking to be relieved from tax obligations through the Innocent Spouse Relief had to do so within two years from when the IRS contacted the spouses for collection. In practice, many spouses who were innocent to the tax liability because they were either unaware of the due taxes or were in abusive marriages (and could not refuse signing because of duress or pressured influence) could not qualify for relief because of the time limitation. One reason for this is that if the IRS contacted the “guilty” spouse for collection, he or she may conceal this from the other “innocent” spouse and thus, the innocent spouse would remain unaware of the collection process. When the “innocent spouse” finally becomes notified of the back taxes being collected, often times, it would be past the two year time limit and therefore, too late to claim the relief. However, with the removal of the 2-year time limit, many innocent spouse will now get their relief with no time constraints.

Time Limit Still Applies for Some

The IRS however, maintained that the two year rule will still apply for spouses who became aware of the IRS collection within the two year time frame and did not take any action. This rule however, will not apply for any spouse who is or was in an abusive marriage.

About Innocent Spouse Relief

The Innocent Spouse Relief is a tax relief provided to spouses who file taxes jointly with their partner. The current rules for the relief were introduced into the tax code in 2002. According to the tax code, when a couple files taxes jointly, they are both held responsible for the information in the tax return and should an issue arise from the tax return, they are both held liable individually (and the IRS can collect the back taxes from either or both of the spouses). However, under the Innocent Spouse Relief, if a spouse is unaware of false information claimed on the tax return (and the IRS discovers the false information in the returns), the spouse can be absolved from the consequential tax liability that may arise. The innocent spouse will need to file IRS Form 8857- “Request for Innocent Spouse Relief Form” and provide an explanation of their innocence in the tax liability. If there is enough evidence to show that the spouse could have been unaware of the due taxes or forced to sign the tax returns against his or her will, the IRS will relieve the spouse of the taxes due.

The Scope of the Relief

The IRS receives on average about 50,000 Innocent Spouse Relief applications every year. They however, reject close to 2,000 applications for the lapsing of the two year limitation. However, with this new inclusion to the tax code, many of these victims will now receive justice and get the relief. The IRS has stated that this new rule will take effect immediately and any cases that are still under review will now be considered under this new rule. Any spouse who had been denied the relief because of the time limitation prior to the announcement can now reapply for the relief.

Action towards Removal of the Time Limitation

The removal of the time limitation on the Innocent Spouse Relief came after a spirited campaign by politicians and activist groups. The opponents of the former two year rule argued that the limitation cut off many innocent spouses from getting justice. Earlier in 2011, a group of House Democrats wrote a letter to the IRS commissioner, seeking the IRS remove the two year time limit. This followed many debates and discussions on Capitol Hill and the media that sort to have the IRS remove this rule. After all of these tremendous efforts, the changes have come as a welcome relief to many.

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Extended Deadline for Truck Drivers Postpones IRS Payments

July 22, 2011 By

The IRS filed a Temporary and Proposed Regulations notice in the Federal Register on July 15th 2011 to officially postpone the deadline for the payment and filing of the Highway Use Tax. The Highway Use Tax was due on August 30th, 2011 but the deadline has now been pushed to November 30th, 2011. According to a press release on the IRS website, the reason for this postponement was because this Highway Use Tax is set to lapse on September 30th, 2011. Since Congress may enact new changes and modifications to this tax after its expiration, the IRS has chosen to extend the deadline so that truck owners will not need to file tax returns twice to accommodate any such changes, postponing their IRS payments due. Following this extension of the tax deadline, the IRS will not receive any payments for the Highway Use tax or accept any related tax returns prior to November 1st, 2011. The truck owners affected by this extension are those for trucks that were in used in July and trucks that were first used in August and September.

About the Highway Use Tax

The Highway Use Tax is a tax paid by owners of heavy commercial vehicles including trucks, buses, and truck tractors that have a gross taxable weight of 55,000 pounds and over. These truck owners are required to annually pay a Highway Use Tax customarily on or before August 30th of every tax year. The tax is a levy for the use of interstate highways that are under the Federal government. According to the current tax code, qualifying vehicles pay a maximum of $550.00 annually. The tax payable increases with the weight of the vehicle. There are also lower rates applicable to various categories of vehicles, including those that use the highways in a minimal way, vehicles used for agricultural purposes, vehicles used for logging, vehicles transferred within a year, and those that are purchased after June 30th of a given year. The owners of these qualifying vehicles are required to file a Form 2290, “Heavy Highway Vehicle Use Form” and pay the required taxes on or before the August deadline. In 2010, the IRS collected a total of $886 million from about 650,000 truck and bus owners who filed a Highway Use Tax return.

State Regulations to Enforce the Tax

To ensure that the qualifying truck and bus owners pay the required Highway Use Tax, the Federal law requires the state authorities to confirm proof of payment of this tax before registering the vehicles. The IRS stamps the Schedule 1 on receipt of the Highway Use Tax and this stamped Schedule 1 is what is used as proof of payment when seeking state registration.

Adjustments to these State Regulations

Given that the tax deadline has been extended, the IRS has adjusted the state rules for the registration of qualifying trucks. Trucks requiring registration before the extended deadline of November 2011 can now use the prior year’s stamped Schedule 1 as proof of payment. For the qualifying vehicles purchased after June 30th 2011 – and therefore do not have the prior year stamped Schedule 1, the IRS has allowed states to register such vehicles without any payment proof for the Highway Use Tax. These truck owners are however, required to provide proof that the owner purchased the truck within a period of 150 days.

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Apple and the IRS Tax Holiday

April 18, 2011 By

A tax holiday for big corporations may mean that some of them come back to the United States with their money. Even if corporations are headquartered in the U.S., they are not necessarily holding all of their money here. In fact, they are probably not holding their money here because it is expensive.

Unlike personal tax rules, corporations are able to keep their money in offshore accounts without having to pay taxes on it until they want to bring it back into the country. Many corporations take advantage of this because the U.S. has the second highest corporate tax rate in the world. However, it would be pretty cool if we could have that money here at home and in the revenue stream rather than sitting in an account guarded by gun-wielding guards and locks the size of a car. In order to incentivize bringing those bucks back into the States, some government figures have proposed a tax holiday, a period during which big companies can repatriate their money without having to pay the same high amounts of IRS taxes.

This idea has come up in conversations in what seems like a whisper, with the loudest whispers coming from Rep. Eric Cantor (R-VA) and Sen. Orrin Hatch (R-UT). However, it is not endorsed by Treasury Secretary Timothy Geithner.

However, big name companies like Apple, Microsoft, and Pfizer have been looking around for beneficial tax venues – i.e. countries with more lax tax policies like Ireland. Since the political climate in the U.S. and the financial climate in Ireland are shifting, some of these companies might be considering coming back home.

How do we know this? Well, last fall, Apple’s Steve Jobs said his company was waiting for “one or more unique strategic opportunities” before making the move. Apple, a traditionally politically cautious company, has also signed on with Fierce, Isakowitz and Blalock in Washington, DC., a lobbying firm that is rumored to plan to try to make the new leaders in Congress think about their financial and privacy concerns. Read: Apple wants to pay less taxes and will not bring their money back into this country until they can.

While tax reform is certainly under way, it is very unclear what is going to happen with both individual and corporate taxation. A lot of new and proposed policy focuses on getting back lost revenue and closing loopholes. Corporate taxation, though is a little more unclear, and corporations whose leverage might just stay in other countries seem to have different ideas about what is best for U.S. tax policy.

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Make Sure to Make Work Pay with Your 2011 IRS Tax Return

March 23, 2011 By

Many taxpayers are eligible for the Making Work Pay tax credit on their 2010 tax returns. This credit is based on your earned income for 2010. When filing your taxes, it is important to consider several factors to be sure that you receive the total portion of the credit for which you are eligible.

The credit is available for up to $400 for individual taxpayers, and up to $800 for taxpayers who are married filing jointly. This IRS tax credit is refundable. Many workers have already seen the benefit of the Making Work Pay tax credit in their paychecks, which is reflected in lower federal employee tax withholdings.

Taxpayers whose adjusted gross income in 2010 was over $95,000 as an individual or $190,000 married filing jointly are not eligible for the credit. Furthermore, taxpayers who can be claimed on someone else’s return as a dependent cannot claim the credit. Also, taxpayers who are nonresident aliens or do not have a social security number cannot claim the credit.

How you file for the Making Work Pay tax credit depends on which form you file for your federal income tax return. If you file a 1040 or 1040A, you will claim the credit on Schedule M. By using Schedule M, you will be able to determine whether you have already received the full benefit of the credit through the abovementioned deductions of federal withholdings from your paycheck. If not, you may be due the full amount or a portion of the amount.

If you file using 1040-EZ, use Line 8 which is on the back of the form. You will also be able to determine whether you have already received the full benefit of the credit through lowered federal deductions on your paychecks and to figure the remaining amount due. It may be beneficial to get tax help to correctly claim the credit.

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The Nitty without the Gritty of the New Tax Bill and Tax Relief

March 17, 2011 By

On December 17, 2010, Congress approved a bill with which Obama extended the Bush tax cuts for everyone, including even the wealthiest Americans. Obama also added some further allowances. This tax bill will cost $900 billion. All politics aside, what does this tax bill mean for you?

Notably, the income tax brackets will remain the same, rather than going up, for at least two more years. Furthermore, the alternative minimum tax (AMT) was adjusted to allow 21 million taxpayers to avoid this tax who would have otherwise had to pay it. Had this adjustment not been made, singles making over $33,750 and married couples making $45,000 jointly would have to pay higher taxes. Additionally, your social security taxes have been reduced from 6.2% to 4.2% as an employee. The employer portion remains at 6.2%, which means that if you are self-employed, you will be paying the employer portion of 6.2% plus the lower 4.2%, which means if you make $50,000, you’ll pay $1,000 less. The deal also allows businesses to write off some capital expenses and extends unemployment for another 13 months, which is intended to benefit seven million people.

This bill also discontinued the return of a 55% estate tax after the first $1 million. Instead, it is 35% after the first $5 million. In addition, the capital gains tax of 15% remains in place, versus the scheduled rise to 20% for capital gains. Dividends would have been taxed as income. Furthermore, there is the American Opportunity Tax Credit of $2,500 if you make under $80,000 or $160,000 with your spouse, 40% of which is refundable if you have no tax liability. This may mean some tax relief for you.

The child tax credit of $1,000 has been extended, including a refundable portion for low income families. Taxpayers making under $75,000 singly and $110,000 jointly can get the full credit, and after that the credit phases out.

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The Tax Relief Act: Can it Affect your Withholdings?

March 9, 2011 By

Enacted on December 17, 2010, the Tax Relief, Unemployment Insurance Re-authorization and Job Creation Act of 2010 included several changes that affect many taxpayers for 2011 IRS filing. This includes the worker’s take home net pay and retirees’ pension checks. The Tax Relief Act extended the income tax rates that were supposed to end last year in 2010, which had prevented a large increase in income tax withholdings. Unfortunately, this extension did not save the Making Work Pay Credit as this credit will only pertain to this year. Pension recipients were not included in the MWP credit unless they worked part time and had a taxable income.

Due to the Tax Relief Act which made income tax rates lower than before, taxpayers will see an increase in their net pay (take-home pay amount) on each of their checks earned.

However, the same does not apply for pension checks. Once the pension plan administrators implement the new changes for 2011, pension retirees will see a decrease in their pension checks by as much as $7-$50 per pension pay check. Unfortunately, this hurts the retiree but the option to change withholding can deflect some of this. Check into what changes the withholding can affect for you.

Without the Making Work Pay Credit, we, the working people, are not benefiting from these new changes. Nevertheless, there are still other changes out there that were made to enable more tax relief; it is a matter of balance and checking out all options for each taxpayer as each taxpayer is different than others. The IRS encourages all taxpayers to review withholdings information every year with the use of a withholding calculator that is available on the www.irs.gov. If any necessary changes are needed, use the W-4 form to make adjustments to withholding to help along the way for taxes.

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First Time Homebuyer Credit on Your Federal Income Tax Return

March 4, 2011 By

The first time homebuyer credit is available for both first time homebuyers and for long-time residents purchasing a new home. To qualify for the credit, the taxpayer must have been at least 18 years old when he or she bought the home (or at least one person in a married couple filing jointly must be 18), and not another taxpayer’s dependent.

The maximum credits are $8,000 for married first-time homebuyers, $4,000 for single for first-time homebuyers, $6,500 for married long-time resident homebuyers, and $3,250 for single long-time resident homebuyers. Taxpayers who wish to claim the credit must file a paper return using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit and provide supporting documentation. The supporting documentation must include a properly executed settlement statement, a dated certificate of occupancy for new homes, or the retail sales contract for mobile homes when there is no settlement statement.

To claim the first-time homebuyer credit on your federal income tax return, the taxpayer or married taxpayers must not have jointly or separately owned a home within the past three years. To be considered a long-time resident homebuyer, the person or couple claiming the credit must have lived in the same principal residence for five of the previous eight years. These years are counted from the date of purchase. The taxpayer must have purchased or entered into a binding contract to purchase the home on or before April 30, 2010. If they entered into a contract by this date, they must have closed the deal by September 30, 2010.

Long-time residents must attach documentation covering the abovementioned five year period including Form 1098, Mortgage Interest Statement. Members of the military and some federal employees have one extra year to buy a principal residence in the U.S. More information is available on the IRS website at www.irs.gov/recovery.

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The Gift Tax and Who is Responsible for the IRS Payment

March 1, 2011 By

What is a Gift Tax? A Gift Tax is any real estate property or other valued “property” items such as jewelry or stocks. When these properties are given to someone other than a spouse, they are considered a gift when the “giver” is not expecting full money value or no money return. The gift can be given to any such person, family, friend or business partner as long as it is not the spouse.

However, the “giver” is responsible for the IRS payment towards the gift that he or she gave to another other than a spouse. This can get confusing and makes the Gift Tax one of the most misunderstood taxes in the IRS Tax Law…

To file the Gift Tax, use IRS Form 709-United States Gift (and Generation Skipping-Transfer) Tax Return. The gift return or any gift tax is due the following year that the gift was given. For example, if a person decided to give the “gift” of a house to his/her son as a wedding present in 2010, then the tax amount owed from the gifted house is due by no later than April 15th in 2011. If you gave a gift of real estate, jewelry, stocks, bonds, put a person on their checking or savings bank investment account that had a fair amount of money, or any other type of property in the year of 2010, then you are responsible for filing and reporting that gift and paying taxes on them by this April.

The recipient of the gift will not incur responsibility of paying taxes on the gift received immediately because it is not included in the recipient’s taxable income (yet). However if the gift is sold, then that recipient will be responsible for paying the capital gains tax incurred for selling the gift. In the end, a gift may end up costing you some significant amount in taxes and some gifts may not “keep on giving” but actually, take!

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Make Work Pay When You File Your 2010 IRS Tax Return

February 28, 2011 By

The Making Work Pay credit is still available for your 2010 tax return, even though you may currently be seeing the benefit of the payroll tax holiday. The Making Work Pay credit is easy to forget in light of the press coverage of the 2011 payroll tax holiday. The payroll tax holiday applies to your paycheck in 2011, while the Making Work Pay tax credit applies to your 2010 federal income tax return, which you are to file this year. Keep in mind that the deadline for filing is April 18, 2011.

The credit was created to benefit working and middle class taxpayers, which means it phases out as taxpayers’ income gets higher. The credit is primarily an incentive to work and taxpayers must have earned income to qualify. This means that qualifying taxpayers must have wages from work, not just income from other sources, to receive the Making Work Pay tax credit.

The Making Work Pay tax credit is a flat credit of up to $400 for individual taxpayers and $800 for those married filing jointly. Self employed persons are also eligible. The credit is also refundable, which may mean you get a few extra bucks on your tax return this year!

Remember that even if you currently see evidence of the payroll tax holiday, the Making Work Pay credit is still available for you on your 2010 tax return. The credit is usually figured on Schedule M. You can also find more details on the IRS website at http://www.IRS.gov, or you can talk to a tax specialist to see if it applies to you.

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