THE JUST TAXES! CLIENT NEWSLETTER

PUBLISHED SEMI-ANNUALLY BY JUST TAXES!

7311 Greenhaven Drive, Suite 274, Sacramento, California 95831-3579

(916) 393-3430

________________________________________________________________________

 

Dear Client:                                                                                                                        January 2011

 

“Settling In”

 

We mentioned in our last newsletter that we were “Dropping Anchor” at our old office. However, as you also hopefully noted in the insert to that newsletter our situation changed rather suddenly. As a result, we have moved to a new office complex just down the street from our old office. We’re now located in the Greenhaven Executive Park, at the corner of Greenhaven Drive and Corporate Way. We’ve included a map along with driving directions to assist you in finding us. We think that you’ll be well pleased by our “new digs.”

 

New E-Mail Addresses

 

As shown on the Masthead, our telephone numbers have not changed. However we do have new email addresses: Diana Muller: diana@ just-taxes.com or Dennis Graff: dennis@just-taxes.com.

 

Shred-It day

 

Our annual free Shred-It Day for our clients, their families, neighbors, and friends will be held on Saturday, January 29^th, from 10 am to 2 pm. Refer to the enclosed insert for details.

 

New Employee

 

After considerable thought we decided that it was time to hire an additional tax preparer. Deciding to hire a new employee was the easy part. The hard part was finding a qualified individual who would enable us to maintain our standards of professionalism and client service. Rather than advertising, or hiring a search firm, Diana and I decided to conduct our own search. After considerable effort we were finally able to identify and hire a new employee. We have no doubt but that you’ll like her as well as we do.

 

Meet Jennifer

 

Jennifer Smith is an Enrolled Agent authorized to practice before the Internal Revenue Service. A native of Minnesota, Jennifer has an Associate of Science Degree in Accounting and ten years of finance and accounting experience, including employment as a Certified Tax Preparer for a national income tax service. Additionally, she is the founder of a home-based income tax preparation service and has a well established client base. She is also bilingual and speaks, reads, and writes fluent German. Jennifer will provide support during week days and will also be available to prepare tax returns for new clients.

 

 

 

 

 

We’re Registered

 

On August 24, 2010 our business name, Just Taxes, was officially registered by the United States Patent and Trademark Office. As a result, no other business entity may use that name without our express consent. We’re now in the process of registering our logo as well.

 

The Election

 

Perhaps the most salient point of the November mid-term election was not who won or lost, but rather the effect that the election will have on a number of unresolved tax issues. Since the Congressional leadership will remain in Democratic hands until January 3rd the “legislative ball” will remain in their court until control of the House of Representatives shifts to the Republicans. As a result, significant tax related issues will have to be addressed by the lame-duck Congress. There are, at this point, two significant tax issues that must be resolved in short order. First, Congress must pass yet another temporary “patch” to the Alternative Minimum Tax to prevent a significant tax increase for over 32 million tax payers. Second, Congress must determine whether to extend the Bush tax rates to prevent an across the board tax increase for all taxpayers. Until this issue is resolved the IRS will not be able to compute the 2011 income tax withholding tables, and individuals will be unable to do any meaningful tax planning. I assume that these issues will have been resolved by the time that you receive this newsletter.  Regardless, listed below are brief summaries of the 2010 tax code that may affect your individual income taxes this year:

 

• The personal exemption for all taxpayers will remain the same as in 2009;  $3,650. The standard deduction for married and single taxpayers will also remain the same at $11,400 and $5,700, respectively. However, the standard deduction for those filing as Head of Household will increase by $50 to $8,400

 

• The Hope Education Credit has been replaced by the American Opportunity Credit. This credit provides a deduction of up to $2,500 per student per year for four years of college.

 

• The credit for Energy Saving Home Improvements is 30 percent of the cost incurred, not to exceed $1,500. This credit applies to qualified insulation, windows, outside doors, biomass fuel stoves and high-efficiency furnaces, water heaters, and central air conditioners.

 

• The educator’s deduction of up to $250 for unreimbursed expenses remains in effect.

 

• The first $2,400 in unemployment benefits is no longer tax free.

 

• The new vehicle sales tax deduction has expired.

 

• The standard mileage rate for business travel has been reduced from $0.55 to $0.50 per mile.

 

“The Tanning Tax”

 

A reminder for those of you who provide indoor tanning services that you must now pay a 10 percent excise tax quarterly using Form 720. We’ve also heard rumors that the “tanning police” will soon be ticketing individuals who have really good tans and fining them for excessive personal use of solar energy. However, this “sun tax” will apparently be waived if the individual can provide proof that they got their tan using an indoor tanning service. There is, of course, a waiver for farmers and construction workers provided that their tans are limited to their arms and neck. Celebrities, politicians, and television news anchors are, of course, exempt. (Just kidding, but don’t mention the idea to a politician).

 

Do You Own Rental Property?

 

Recipients of rental income from real estate who make payments of $600 or more to a service provider (such as a plumber, painter, electrician) related to earning rental income are now required to file a Form 1099-MISC with the IRS and the service provider effective for payments made after December 31, 2010. For example, if you pay your gardener $1,200 and your handyman $900 to take care of your rental property you will need to issue a Form 1099 to both. This will require that you have the name, address, and social security number of each service provider. In that regard, you should have each provider complete a Form W-9 which will provide you with the required data. For payments made in 2011, the Form 1099-MISC must be filed not later than January 31, 2012.

 

Who Says Gambling Doesn’t Pay?

 

A long-time client, who doesn’t gamble, recently visited one of the nearby Indian casinos to have lunch with friends. They were informed that there would be a short wait prior to being seated so she reluctantly put a few coins in a slot machine -- and won over $200,000! After recovering from the shock she made an appointment with Diana to discuss the tax ramifications of her winnings. I haven’t been able to keep Diana out of the casinos since that time. Congratulations, Anna!

 

Due Diligence: “A Rock and a Hard Place”

 

At a recent Nationwide Tax Forum that I attended the IRS representative stated that merely accepting a “yes” or “no” answer to a question from a client was not acceptable. Specifically the agent stated that the tax preparer must ask the client detailed questions to ensure that the answer given is, in fact, correct. Further, the agent stated that the questions asked be documented to prove that the preparer in fact exercised due diligence. Based on our experience there are many instances in which a straightforward “yes” or “no” answer is fully acceptable. In other instances additional information obviously needs to be obtained. We are somewhat concerned that the IRS may be trying to force the tax preparer to act as an agent of the IRS instead of as a representative of the taxpayer. That really puts tax preparers between a “rock and a hard place.” We’ll keep you informed on this situation as it evolves.

 

My New Year’s Resolution

 

I somehow always manage to convince myself to make a New Year’s resolution, usually with little success. But, in doing so, I always review my previous resolutions to see how I’m doing. Here’s the list:

 

                2007: I will get my weight down below 180 pounds.

                2008: I will follow my new diet religiously until I get below 200 pounds.

                2009: I will develop a realistic attitude about my weight.

                2010: I will work out 3 days a week.

                2011: I will try to drive past a gym at least once a week

 

P.S. Did you know the “stressed” spelled backwards is “desserts”?

“The Use Tax”

 

As you are probably aware, you must pay California use tax if you purchase an item out-of-state (by telephone, over the internet, by mail, or in person) and the seller does not collect California sales tax. This is becoming an area of ever increasing scrutiny by the Board of Equalization due to its potential as yet another source of income for our beleaguered state budget. So now you know why we will be asking each of you if you made any out-of-state purchases during the tax year and, if so, the approximate value of the purchases for which you were not charged California sales tax.

 

Factoids That Probably Only Interest Me .  . .

 

USA TODAY reported that the number of federal workers earning $150,000 or more a year has soared tenfold in the past five years and has doubled since President Obama took office.

 

The bipartisan panel charged with finding ways to cut the $13.7 trillion national debt will apparently recommend more than $3.8 trillion in cuts from defense and domestic spending programs. This proposal met with quick resistance from Democrats and Republicans alike. Democrats refuse to cut spending, and Republicans refuse to raise taxes. Wow! What a surprise.

 

On November 3^rd the people of California overwhelmingly reelected Democratic incumbents and candidates. The following week the “non-partisan” Legislative Analyst’s Office projected that California must close a $25.4 billion shortfall next year, twice as large as Democratic legislative leaders predicted prior to the election. Meanwhile several of our reelected legislators are vacationing in Maui, compliments of special interest groups and lobbyists. And another group is conducting a “fact finding” trip to Spain, again compliments of a special interest group.

 

The Kiplinger Letter listed California as the most tax-unfriendly state for retirees.

 

Client Organizers

 

We will mail client organizers in mid-January to those clients who have requested them. Call us if you want an organizer but haven't received one by the end of the month.

 

 

                                We look forward to seeing you,

 

                                Dennis “Diet King” Graff            Diana “Casino Queen” Muller  

                                Resident Grump                               Enrolled Agent

                               

The Just Taxes Client Newsletter is published semi-annually for our clients by Just Taxes!, 7311 Greenhaven Dr, Ste 274, Sacramento, CA 95831-3579. Copies may be obtained by calling (916) 393-3430.

 

The content in this newsletter is provided for your personal information only, and is not intended to be used for making specific tax related decisions, nor is it intended to provide any form of investment or legal advice.

 

Quotations for political or commercial use are not permitted. Duplicating or photocopying individual items for personal use is permitted.

 

THE JUST TAXES! CLIENT NEWSLETTER

PUBLISHED SEMI-ANNUALLY BY JUST TAXES!

7220 Greenhaven Drive, Suite 3, Sacramento, California 95831-3581

(916) 393-3430

________________________________________________________________________

 

Dear Client:                                                                                                                        July 2010

 

Whew . . . What a Year!

 

Both of us are still in the recovery mode from an extraordinarily hectic tax season in which seven day weeks and 10 hour days were the norm. However, shortly after April 15^th Diana conned some poor unsuspecting soul into taking care of her two hyperactive dogs, her two mean spirited cats (“Bitey” and “Scratchy”) as well as her two overly rambunctious kittens, quickly packed her bags, and headed for Hawaii. I brought a beach blanket, umbrella, suntan lotion, and a sunlamp to the office and tried to imagine that I was laying on the beach in Maui. Didn’t work, so I’ve stopped wearing my Speedo to the office. Regardless, we can’t complain since our goal in starting Just Taxes! was to “grow the business.” It is obvious, however, that we either need to hire an additional tax preparer or limit the number of new clients. At this point we’re considering both options.

 

We’ve “Dropped Anchor”

 

For the uninitiated dropping anchor is “Navy talk” for “staying put.” Anyway, our office building has been sold and we are negotiating a lease with the new owner. Hopefully we’ll be in the same location for the foreseeable future. That’s good news for us, and we hope for you as well.

 

Looking Ahead

 

We have been besieged by questions regarding changes in the 2010 tax code. While most of the proposed changes are still in the negotiating stage there are some changes that appear to be “set in stone.” Our thoughts are summarized below:

 

Tax Rate Increases. Since this is an election year we don’t anticipate any tax rate increases until the first of the year when the Bush tax cuts expire. The reason, of course, is that the primary goal of virtually all of our elected officials is to be reelected and raising taxes in an election year might hinder that endeavor. However, lawmakers will be forced to raise taxes before long in order to rein in the federal budget deficit. Our national debt is currently in excess of $13 trillion. To keep these numbers in perspective, $13 trillion is the equivalent of about $42,000 for each of us and, based on current projections, this amount will grow substantially by the end of the decade. For clarity, the government has charged $42,000 to the credit cards of every man, woman, and child residing in the United States and we, the taxpayers, are paying an ever increasing amount of interest as our debt continues to grow. To further complicate matters, if the cost estimates for the recently enacted health care reform law are not accurate the deficit will increase exponentially. And we still have a “carbon tax” looming on the horizon. Since we are not aware of any government program enacted in our lifetimes that has not cost significantly more than the initial projections, we believe that our concerns are well warranted. We are sincerely concerned about the deficit. You should be too. The government needs to stop spending money that they don’t have on things that we don’t need.

So Let’s Just Tax The Rich. President Obama has announced his intent to raise taxes on “the rich” which he generally defines as married couples earning more than $250,000 a year.  Additionally, there is little doubt but that the 33 and 35 percent tax brackets will be increased to 36 and 39.6 percent, respectively. These rate increases will affect married couples earning more than $209,000 and singles earning more than $172,000. (As I noted in a previous newsletter there is nothing unique about the 39.6 percent rate other than the fact that it is 99 percent of 40 percent. It’s like selling something at $ 1.98 instead of $2.00; somehow $1.98 just sounds better). If nothing else, our legislators are good used car salespeople. (My apologies to used car salespeople). The rich will also be paying a 0.9 percent Medicare surtax on their wages and self employment income and, starting in 2013, a 3.8 percent Medicare tax on their investment income. Investment income is defined as interest, dividends, capital gains, annuities, royalties, and passive rental income. As you may know, these new taxes were the primary source of revenue for the health reform law. It also seems inevitable that tax rates on capital gains and dividends will be increased to at least 20 percent for upper income earners. Additionally, some legislators are also proposing that dividends be taxed as “ordinary income.” This could increase those tax rates to 39.6 percent. It is, of course, easy to engage in “class warfare” by demonizing the wealthy. This seems to be particularly effective in gaining political support from those who pay little if any tax. Virtually all of our clients are in the top 50 percent of wage earners (i.e., they earn more than $31,000 per year). So collectively you belong to that group of wage earners who pay 97 percent of all federal income taxes. The bottom 50 percent, who pay only 3 percent, apparently believe that they shouldn’t have to pay anything at all. It seems as though the Obama administration agrees.

 

Watch Out for Stealth Taxes. The government needs additional sources of income and I have no doubt but that our elected officials are hard at work figuring out how to increase our taxes while denying that they’ve done so. These so called “stealth taxes” are taxes that are levied in such way that they are largely unnoticed, or at least not recognized as a tax. Examples include taxes on candy and soft drinks because the government “wants to improve our diets,” or taxes on cigarettes because the government “wants to improve our health,” or taxes on carbon emissions because the government “wants to improve our environment,” and so on, and so on and so on. Don’t believe the rhetoric. In my opinion our congressmen and women could care less about your diet, health, or the environment. They just want the money, because spending other people’s money is the basis of their power. Stealth taxes are also readily evident in our tax codes which give special exemptions to favorite industries, or which reduce or eliminate personal deductions or tax credits based on arbitrary income limitations. Our state and federal officials are also considering requiring service industries (such as attorneys, financial advisors, accountants, and tax preparers) to collect sales taxes on their services. I somehow believe that lawyers, who are politically well connected (i.e., they spend a lot of money keeping incumbents in office) will be exempt. Additionally, the Obama administration is now considering the “Mother of all Stealth Taxes” – the Value Added Tax, or VAT.  The VAT is essentially a consumption tax that is placed on a product whenever “value is added” at each stage of production. For example, a logger cuts down a tree and pays a value added tax because in doing so he has increased the value of the tree by making it into a log that can be sold to a mill. (For the politically sensitive, this particular logger is a young male who has been forced to work in the timber industry in order to support his aging grandmother and younger sister who was disabled after being attacked by a spotted owl). Anyway, the mill then processes the log into lumber and, as a result, pays a value added tax because the tree/log/lumber can now be sold to a furniture manufacturer. The manufacturer then uses the tree/log/lumber to produce tables and chairs and pays a value added tax because the value of the tree/log/lumber/furniture has again been increased. While the tax is assessed and paid at each different stage, it is the consumer who eventually ends up paying the additional cost. For example, when a customer purchases a table she is now paying $240 instead of $200 since the VAT has increased the price at each stage of production and those costs are, of course, passed through to the consumer. (This particular consumer is an attractive female wearing flats, form fitting jeans, a black sweater over a white Tee shirt, and a Muslim head scarf. (Whoa . . . I’m not certain whether I’m fantasizing, hallucinating, or profiling). The bottom line is that your taxes are going to increase. You can bet on it . . .

 

 A Case Study

 

Just Taxes! is a partnership and, as such, our profit is “passed through” to our individual income tax returns. As a result, I pay both federal and state income taxes as well as self employment tax on my earnings. In 2009, these taxes consumed 48 percent of my income from our business. In short, after taxes I got to keep $0.52 of every dollar that I earned (and I’m not even close to being rich). In comparison, if I were unmarried with three illegitimate children and received no child support payments from the father(s) of my children I would be eligible for social assistance (SSI/SSDI, Welfare, Medicare/Medi-Cal, and Food Stamps) as well as the Earned Income Tax Credit. If I were to work nine months a year at minimum wage, and had no income tax withheld, at the end of the year I would receive a tax refund from the federal government of over $7,400. In short, I would be earning almost $20,000 a year tax free (excluding the value of any social assistance that I received). Where is the incentive to work?

 

On a Lighter Note . . . Actual Letters Received by Government Agencies

 

"I am glad to report that my husband who was reported missing is dead."

 

"I am very much annoyed to find you have branded my boy as illiterate. This is a dirty lie. I was married to his father a week before he was born."

 

“I am forwarding my marriage certificate and my three children, one of which was a mistake as you can see.”

 

"In accordance with your instructions, I have given birth to twins in the enclosed envelope."

 

“You have changed my little boy to a girl. Will this make any difference?”

 

“Cash for Caulkers”

 

Most of the residential energy credits available in 2009 will continue to be available this year. But there have been some changes. Last year it was “Cash for Clunkers.” This year it is “Cash for Caulkers.”  Specifically, the House of Representatives has approved a $6 billion measure to provide rebates to homeowners who invest in energy efficient improvements. This bill would fund rebates of as much as 50 percent (not to exceed $3,000) for energy-savings efforts such as insulation improvements and the replacement of windows, doors, heating and cooling systems. This work must be completed by a qualified contractor. Additionally, homeowners who conduct comprehensive energy audits and reduce their home’s total energy consumption by 20 percent can receive up to $8,000 in rebates. This bill, which remains unfunded (surprise, surprise) is awaiting Senate confirmation.

 

Are You Self Employed?

 

The IRS is continuing to increase the frequency of audits for those of us who are self employed. As Diana and I stress to each of our self employed clients, your business must be carried on in a business like manner and you must maintain financial records that fully document your income and expenses. Further, we usually urge our self employed clients to maintain separate business checking and credit card accounts so as not to comingle personal and business related expenses. You should also have at least a simple business plan. If you don’t, you need to consider creating one. Finally, in a recent court case a self employed taxpayer was denied the deduction for the business use of his vehicle because of improper substantiation. Specifically, the taxpayer kept a log of his travel and noted the beginning and ending mileage each day, but did not include a listing of the places he stopped or the business purpose of each stop. As a result, the taxpayer was denied any mileage deduction. Enough said. In the event of an audit you must provide comprehensive documentation of your expenses, or those expenses will be denied.

 

Quick Notes

 

A gentle reminder for those of you old enough to have voted in the 1960 presidential election that you are once again required to take the Minimum Required Distribution from your IRA.

 

In response to popular demand (well, two phone calls) we are once again planning to have our annual Shred-It Day in late January. We’ll provide you with the details in our next newsletter.

 

Tax Preparer Reforms

 

As you may be aware, the IRS has announced changes in its oversight of tax return preparers. Specifically, IRS will require registration of all preparers who sign returns along with competency testing and mandatory continuing education. We fully support and endorse this effort.

 

Words That Give Me a Headache

(In No Particular Order)

 

Stakeholder, Unidentified Source, Diversity, Undocumented Worker, Nazi, Fascist, Racist, Bigot, Awesome, Lunatic Fringe, Homophobe, Politically Correct, Pro Choice, Pro Life, Empowered, commercials that state “But Wait, There’s More” or “You Deserve” and, my personal favorite, Experimented with Drugs. Let’s see, I guess that means that I “experimented” with cigarettes for about 20 years and I still “experiment” with a glass of red wine before dinner whenever possible. Now I’ve really got a headache. Time to refill my medical Marijuana prescription . . .

 

And In Closing

 

In reviewing this epistle it seems as though it is somewhat negative. I considered rewriting it, but decided that doing so would be a disservice to you. I’m very concerned about the economy, and the future of my children and grandchildren. You should be as well.

 

                                Until Next Time,

 

 

                                Dennis “Speedo”Graff                  Diana “Mai Tai” Muller               

                                Resident Grump                               Enrolled Agent

                               

The Just Taxes Client Newsletter is published semi-annually for our clients by Just Taxes!, 7220 Greenhaven Dr, Ste 3, Sacramento, CA 95831-3581. Copies may be obtained by calling (916) 393-3430.

 

The content in this newsletter is provided for your personal information only, and is not intended to be used for making specific tax related decisions, nor is it intended to provide any form of investment or legal advice.

 

Quotations for political or commercial use are not permitted. Duplicating or photocopying individual items for personal use is permitted.

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.

The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.

Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.

The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.

The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.

Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.

To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.

The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.

Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

Payroll tax cut

The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.

Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.

Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.

House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.

One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.

Extenders

The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.

President Obama’s FY 2013 proposals

President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.

Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.

On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.

If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

Previous disclosure programs

The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.

Reopened program

The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.

The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.

In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.

The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.

Quiet disclosures

One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.

Critics

The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.

If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Dependency Exemption

In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.

Child Tax Credit

Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.

Child and Dependent Care Credit

If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.

Adoption Credit

Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.

Higher Education Credits

There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.

Extended Health Care Coverage

Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.

Child Care Assistance Credit (for businesses)

Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.

If you have any questions about these provisions and how they may benefit you, please contact our office.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

Offset

If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.

A taxpayer’s refund may be reduced by FMS and offset to pay:

• Past-due child support
• Federal agency non-tax debts
• State income tax obligations, or
• Certain unemployment compensation debts owed a state.

FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.

Form 8379

If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.

The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.

The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

February 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.

February 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.

February 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.

February 10

Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.

February 15

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.

February 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.

February 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.

February 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.

February 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.

March 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.

March 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.