The IRS has released the annual inflation adjustments for 2021 for the income tax rate tables, and for over 50 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

The IRS has released the annual inflation adjustments for 2021 for the income tax rate tables, and for over 50 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2021 Income Tax Brackets
For 2021, the highest income tax bracket of 37 percent applies when taxable income hits:

• $628,300 for married individuals filing jointly and surviving spouses,
• $523,600 for single individuals and heads of households,
• $314,150 for married individuals filing separately, and
• $13,050 for estates and trusts.

2021 Standard Deduction
The standard deduction for 2021 is:

• $25,100 for married individuals filing jointly and surviving spouses,
• $18,800 for heads of households, and
• $12,550 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,100 or
• the sum of $350 plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,350 for married taxpayers and surviving spouses, or
• $1,700 for other taxpayers.

AMT Exemption for 2021
The alternative minimum tax (AMT) exemption for 2021 is:

• $114,600 for married individuals filing jointly and surviving spouses,
• $73,600 for single individuals and heads of households,
• $57,300 for married individuals filing separately, and
• $25,700 for estates and trusts.

The exemption amounts begin to phase out when alternative minimum taxable income (AMTI) exceeds:

• $1,047,200 for married individuals filing jointly and surviving spouses,
• $523,600 for single individuals, heads of households, and married individuals filing separately, and
• $85,650 for estates and trusts.

Expensing Section 179 Property in 2021
For tax years beginning in 2021, taxpayers can expense up to $1,050,000 in Code Sec. 179 property. However, this dollar limit is reduced when the Section 179 property placed in service during the year exceeds $2,620,000.

Estate and Gift Tax Adjustments for 2021
The following inflation adjustments apply to federal estate and gift taxes in 2021:

• the gift tax exclusion is $15,000 per donee, or $159,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $11,700,000; and
• the maximum reduction for real property under the special valuation method is $1,190,000.

2021 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2021 is $108,700.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• lifetime learning credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date
These inflation adjustments generally apply to tax years beginning in 2021, so they affect most returns that will be filed in 2022. However, some specified figures apply to transactions or events in calendar year 2021.

The IRS has released the 2021 cost-of-living adjustments (COLAs) for pension plan dollar limitations and other retirement-related provisions.

The IRS has released the 2021 cost-of-living adjustments (COLAs) for pension plan dollar limitations and other retirement-related provisions.

Key Unchanged Amounts
The 2021 contribution limit remains unchanged at $19,500 for employees who take part in:

• 401(k) plans,
• 403(b) plans,
• most 457 plans, and
• the federal government’s Thrift Savings Plan

The catch-up contribution limit for employees aged 50 and over who participate in these plans also remains unchanged at $6,500.

The limitation for SIMPLE retirement accounts is unchanged at $13,500.

For individual retirement arrangements (IRAs), the limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment, and so remains $1,000.

IRAs and Roth IRAs
The income ranges for determining eligibility to make deductible contributions to traditional IRAs and to contribute to Roth IRAs have increased for 2021.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or his or her spouse takes part in a retirement plan at work. The deduction phase out depends on the taxpayer's filing status and income.

• For single taxpayers covered by a workplace retirement plan, the 2021 phase-out range is $66,000 to $76,000, up from $65,000 to $75,000 for 2020.
• For married couples filing jointly, when the spouse making the contribution takes part in a workplace retirement plan, the 2021 phase-out range is $105,000 to $125,000, up from $104,000 to $124,000 for 2020.
• For an IRA contributor who is not covered by a workplace retirement plan but who is married to someone who is covered, the 2021 phase out range is between $198,000 and $208,000, up from $196,000 and $206,000 for 2020.
• For a married individual who is covered by a workplace plan and is filing a separate return, the phase-out range is not subject to an annual COLA and remains $0 to $10,000.

The 2021 income phase-out ranges for Roth IRA contributions are:

• $125,000 to $140,000 for singles and heads of household (up from $124,000 to $139,000 in 2020),
• $198,000 to $208,000 for married filing jointly (up from $196,000 to $206,000 in 2020), and
• $0 to $10,000 for married filing separately.

Saver’s Credit
The income limit for low- and moderate-income workers to claim the Saver's Credit under Code Sec. 25B has also increased for 2021:

• $66,000 for married couples filing jointly (up from $65,000 in 2020),
• $49,500 for heads of household (up from $48,750 in 2020), and
• $33,000 for singles and married filing separately (up from $32,500 in 2020).

The U.S. Supreme Court heard oral arguments in California v. Texas, the latest challenge to the Affordable Care Act (ACA). The ACA expanded insurance coverage, and includes popular provisions such as required coverage of preexisting medical conditions.

The U.S. Supreme Court heard oral arguments in California v. Texas, the latest challenge to the Affordable Care Act (ACA). The ACA expanded insurance coverage, and includes popular provisions such as required coverage of preexisting medical conditions.

Three major issues are at play in this case:

• Do the plaintiff challengers of ACA—two individuals, the Trump Administration, and a number of states led by Texas—have standing to bring this case?
• Did reducing the penalty amount under Code Sec. 5000A(c) to $0 render the individual mandate in the ACA unconstitutional?
• If the mandate is unconstitutional, does that mean the act itself is unconstitutional, in whole or in part?

Background
The individual mandate in the ACA requires that taxpayers either maintain minimum essential coverage, have an exemption, or pay a penalty. The Tax Cuts and Jobs Act of 2017 zeroed out the penalty. The plaintiffs in this case argue that without the penalty, the mandate is unconstitutional. They further contend that the mandate is so essential to ACA that it cannot be severed from the rest of the law, and thus the entire act should be struck down. At the very least, they would like the Court to strike down portions of the ACA.

The challenger states are: Texas, Alabama, Arkansas, Arizona, Florida, Georgia, Indiana, Kansas, Louisiana, Mississippi, Missouri, Nebraska, North Dakota, South Carolina, South Dakota, Tennessee, Utah, and West Virginia. They have added two individuals, and the U.S. Department of Justice under the Trump Administration is also a party.

Other states, the District of Columbia, and the U.S. House of Representatives have intervened to defend the ACA. The intervenor states are: California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, Nevada, North Carolina, New Jersey, New York, Oregon, Rhode Island, Virginia, Vermont, and Washington.

Oral Arguments
The Supreme Court heard oral arguments from both sides of this case on November 10. The challengers argued that Republicans used the 2017 Tax Cuts and Jobs Act to eliminate the law’s penalty for Americans who do not get health coverage. This rendered the mandate unconstitutional, and since the mandate is so essential to the rest of the act, the whole act must also fall.

The attorneys on behalf of the House, however, argued that the plaintiffs are asking the Supreme Court to take on a legislative role contrary to the Court’s precedent, and that striking down the ACA would throw millions of people off their health insurance, end pre-existing condition protections, and create "chaos in the health care sector."

The Supreme Court appeared unlikely to completely wipe out ACA, with key conservative justices Chief Justice John Roberts and Justice Brett Kavanaugh indicating that such a ruling would be too broad of a role for the courts. "I think it's hard for you to argue that Congress intended the entire act to fall if the mandate were struck down," Chief Justice Roberts said.

If the three more liberal justices agree with the two conservative justices, it would provide the minimum five votes needed for the ACA to survive its latest appearance before the Supreme Court. A decision is expected before the end of term in June.

The IRS has provided guidance to taxpayers that want to apply either Reg. §1.168(k)-2 and Reg. §1.1502-68, or want to rely on proposed regulations under NPRM REG-106808-19.

The IRS has provided guidance to taxpayers that want to apply either Reg. §1.168(k)-2 and Reg. §1.1502-68, or want to rely on proposed regulations under NPRM REG-106808-19, for:

• certain depreciable property acquired and placed in service after September 27, 2017, by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021;
• certain plants planted or grafted after September 27, 2017, by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021; and
• components acquired or self-constructed after September 27, 2017, of certain larger self-constructed property and placed in service by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021.

Rev. Proc. 2020-25, 2020-19 I.R.B. 785, and Rev. Proc. 2019-43, 2019-48 I.R.B. 1107, are modified.

Change in Accounting Method
The guidance applies to taxpayers who are changing their method of accounting for depreciable property that includes:

• components described in Reg. §1.168(k)-2(c) or NPRM REG-106808-19 where the component election has already been made; and
• specified plants for which the Code Sec. 168(k)(5) election has been made and that are planted, or grafted to a plant that was previously planted, after September 27, 2017, during the taxpayer’s 2017, 2018, 2019, or 2020 tax year.

This guidance does not apply to property or a plant:

• that is impacted by a late election, or withdrawn election under Code Sec. 163(j)(7) after November 16, 2020, pursuant to Rev. Proc. 2020-22;
• for which the taxpayer is changing from deducting the cost or other basis of such property as an expense to capitalizing and depreciating the cost or other basis, or vice versa; or
• that the taxpayer does not own at the beginning of the year of change, with some exceptions.

In addition, this guidance cannot be used to make a late election, or revoke an election, under Code Sec. 168, Code Sec. 179, or Reg. §1.1502-68.

Taxpayers have a choice of applying the 2020 final regulations under T.D. 9916, the previous final regulations under T.D. 9874, or both the final regulations under NPRM REG-106808-19. However, once a taxpayer applies Reg. §1.168(k)-2 and Reg. §1.1502-68, the taxpayer must apply Reg. §1.168(k)-2 and Reg. §1.1502-68 to all subsequent tax years.

Automatic Extensions of Time
Applicable taxpayers may make a late Code Sec. 168(k)(5) election, a late Code Sec. 168(k)(7) election, a late Code Sec. 168(k)(10) election, a late component election, a late designated transaction election, or a late proposed component election, by filing either:

• an amended Form 1065 for the placed-in-service year of the property, or for the planting year of the specified plant, as applicable, on or before December 31, 2021; or
• a Form 3115 with the taxpayer’s timely filed original Federal income tax return or Form 1065 for the taxpayer’s first or second tax year succeeding the tax year in which the taxpayer placed in service the property or the planting year of the specified plant, or, if later, the taxpayer’s timely filed original Federal income tax return or Form 1065 that is filed on or after November 6, 2020, and on or before December 31, 2021.

Effective Date
This guidance is effective on November 6, 2020.

The IRS has issued final regulations to update the life expectancy and distribution period tables under the required minimum distribution (RMD) rules. The tables reflect the general increase in life expectancy. The tables would apply for distribution calendar years beginning on or after January 1, 2022, with transition relief.

The IRS has issued final regulations to update the life expectancy and distribution period tables under the required minimum distribution (RMD) rules. The tables reflect the general increase in life expectancy. The tables would apply for distribution calendar years beginning on or after January 1, 2022, with transition relief.

RMDs apply to qualified plans, including 401(k) plans and profit sharing plans. They also apply to IRAs (including SEP and SIMPLE IRAs), inherited Roth IRAs, Tax Sheltered Annuity plans, and eligible deferred compensation plans. In general, RMDs must begin for the year the individual reaches age 72. An RMD for a calendar year is determined by dividing the participant’s account balance by the applicable distribution period.

Distribution periods are based on life expectancies and are found in one of three tables, depending on the circumstances:

• During the employee’s lifetime (including year of death), the applicable distribution period is determined by the Uniform Lifetime Table. The figures in that table are the joint and last survivor life expectancy for the employee and a hypothetical beneficiary 10 years younger.
• If an employee's sole beneficiary is the employee's surviving spouse and the spouse is more than 10 years younger than the employee, then the applicable distribution period is the joint and last survivor life expectancy of the employee and spouse under the Joint and Last Survivor Table.
• After the employee’s death, the distribution period is generally based on the designated beneficiary’s age using the Single Life Expectancy Table.

Updated Tables
Distribution periods under the new rules would generally increase between one and two years. For example, a 72-year-old IRA owner who applied the prior Uniform Lifetime Table to calculate RMDs used a life expectancy of 25.6 years. Applying the new Uniform Lifetime Table, a 72-year-old IRA owner will use a life expectancy of 27.4 years to calculate RMDs. As another example, a 75-year-old surviving spouse who is the employee’s sole beneficiary and applied the prior Single Life Table to compute RMDs used a life expectancy of 13.4 years. Under these regulations, a 75-year-old surviving spouse will use a life expectancy of 14.8 years.

Retirees and beneficiaries would be able to withdraw slightly smaller amounts from their plans each year. They could leave amounts in tax-favored retirement accounts for a slightly longer period of time, to account for the possibility that they may live longer.

Applicability Date
The life expectancy tables and Uniform Lifetime Table under these regulations apply for distribution calendar years beginning on or after January 1, 2022. Thus, for an IRA owner who attained age 70.5 in February of 2020 (so that the individual attains age 72 in August of 2021 and the individual’s required beginning date is April 1, 2022), these regulations do not apply to the RMD for the individual’s 2021 distribution calendar year (which is due April 1, 2022) but will apply to the RMD for the individual’s 2022 distribution calendar year (which is due December 31, 2022).

These regulations include a transition rule that applies if an employee died before January 1, 2022, and, under the rules of Reg. §1.401(a)(9)-5, the distribution period that applies for calendar years following the calendar year of the employee’s death is equal to a single life expectancy calculated as of the calendar year of the employee’s death (or if applicable, the year after the employee’s death), reduced by one for each subsequent year.

The IRS has released guidance on its website for employers and employees regarding deferral of employee Social Security tax under Notice 2020-65, I.R.B. 2020-38, 567.

The IRS has released guidance on its website for employers and employees regarding deferral of employee Social Security tax under Notice 2020-65, I.R.B. 2020-38, 567.

In August, the IRS issued Notice 2020-65 in response to a Presidential Memorandum that allowed deferral of the withholding, deposit, and payment of certain employee payroll tax obligations. The Notice allows employers the option to defer the employee portion of Social Security tax from September 1, 2020, through December 31, 2020, for eligible employees who earn less than $4,000 per bi-weekly pay period (or the equivalent threshold amount with respect to other pay periods) on a pay period-by-pay period basis.

To pay the deferred amount, an employer that chooses deferral will ratably withhold the amount of deferred tax from the employees' paychecks from January 1, 2021, through April 30, 2021.

Employers
The guidance provides the following instructions to employers that deferred the employee portion of Social Security tax under Notice 2020-65:

When reporting total Social Security wages paid to an employee on Form W-2, Wage and Tax Statement, the employer should include any wages for which it deferred withholding and payment of employee Social Security tax in box 3 (Social security wages) and/or box 7 (Social security tips). The employer should not include in Box 4 (Social security tax withheld) any amount of deferred tax that has not been withheld.

Employee Social Security tax deferred in 2020 that is withheld in 2021 and not reported on the 2020 Form W-2 should be reported in box 4 (Social security tax withheld) on Form W-2c, Corrected Wage and Tax Statement. On Form W-2c, the employer should enter tax year 2020 in box c and adjust the amount previously reported in box 4 (Social security tax withheld) of the Form W-2 to include the deferred amounts that were withheld in 2021. The employer should file all Forms W-2c with the Social Security Administration (along with Form W-3c, Transmittal of Corrected Wage and Tax Statements) as soon as possible after the employer has finished withholding the deferred amounts. The employer should also furnish Forms W-2c to employees. (More information on completing and filing Forms W-2c and W-3c will be published in the 2021 General Instructions for Forms W-2 and W-3, in January 2021.)

There is similar guidance for employers that deferred withholding and payment of the employee Social Security tax equivalent of Tier 1 Railroad Retirement Tax Act (RRTA) tax.

Employees
There is also guidance for employees whose employers deferred the employee portion of Social Security tax (or the RRTA equivalent tax) under Notice 2020-65:

If an employee had only one employer during 2020 and his or her Form W-2c for 2020 only shows a correction to box 4 (or to box 14 for employees who pay RRTA tax) to account for the tax that was deferred in 2020 and withheld in 2021, no further steps are required.

If an employee had two or more employers in 2020 and the Form W-2c for 2020 shows a correction to box 4 (or to box 14 for employees who pay RRTA tax) to account for the tax that was deferred in 2020 and withheld in 2021, the employee should use the amount of Social Security (or Tier 1 RRTA) tax withheld reported on the Form W-2c to determine whether he or she had excess Social Security tax (or Tier 1 RRTA tax) on wages (or compensation) paid in 2020.

If the corrected amount in box 4 of the Form W-2c for 2020 causes the total amount of employee Social Security tax (or equivalent portion of the Tier 1 RRTA tax) withheld by all of the employee’s employers to exceed the maximum amount of tax owed ($8,537.40 for 2020), or increases an already existing excess amount of employee Social Security tax (or Tier 1 RRTA tax) withheld, the employee should file Form 1040-X, Amended U.S. Individual Income Tax Return, to claim a credit for the excess tax withheld.

Additional Information
Additional information can be found here.

The IRS intends to issue proposed regulations to clarify that state and local income taxes imposed on and paid by a partnership or an S corporation are deductible by the partnership or S corporation in computing non-separately stated taxable income for the year of the payment. The proposed regulations are intended to provide certainty to individual partners and S corporation shareholders in calculating their state and local tax (SALT) deduction limitations.

The IRS intends to issue proposed regulations to clarify that state and local income taxes imposed on and paid by a partnership or an S corporation are deductible by the partnership or S corporation in computing non-separately stated taxable income for the year of the payment. The proposed regulations are intended to provide certainty to individual partners and S corporation shareholders in calculating their state and local tax (SALT) deduction limitations.

The proposed regs described in the notice apply to specified income tax payments made on or after November 9, 2020. Taxpayers can also apply these rules to specified income tax payments made in tax years ending after December 31, 2017, and before the proposed regulations are published in the Federal Register.

SALT Deduction
For tax years beginning after 2017 and before 2026, an individual’s federal SALT deduction is generally limited to $10,000 ($5,000 for married individuals who file separate returns). The SALT deduction includes real property taxes, personal property taxes, income, war profits, and excess profits taxes, and general sales taxes.

However, legislative history indicates that this limit should not apply to taxes imposed at the entity level, such as a business tax imposed on pass-through entities, that are reflected in a partner’s or S corporation shareholder’s distributive or pro-rata share of income or loss on a Schedule K-1 or similar form. Instead, these taxes should continue to reduce the partner’s or shareholder’s distributive or pro-rata share of income.

New Entity-Level Taxes
Some state and local jurisdictions have enacted or are considering entity-level income tax on partnerships and S corporations, sometimes with a corresponding credit, deduction or exclusion for the owners. There is uncertainty as to whether the entity’s payment of such taxes must be taken into account in applying an owner’s SALT deduction limit.

The proposed regs will clarify that specified income tax payments are deductible by partnerships and S corporations in computing their non-separately stated income or loss.

Specified Income Tax Payments
A "specified income tax payment" is any amount paid by a partnership or an S corporation to satisfy the entity’s liability for income taxes imposed by and paid to a state, a state’s political subdivision, or the District of Columbia. This definition applies regardless of whether the tax results from an election by the entity, or whether an owner receives any deduction, exclusion or credit for the payment. Specified income tax payments do not include income taxes imposed by U.S. territories or their political subdivisions.

The partnership or S corporation can deduct specified income tax payments in computing taxable income for the year the payment is made. The specified income tax payments will be reflected in a partner’s or a shareholder’s distributive or pro-rata share of non-separately stated income or loss. Thus:

• a specified income tax payment is not an item of deduction that a partner or shareholder takes into account separately in determining its own federal income tax liability; and
• a specified income tax payment is not taken into account in applying the SALT deduction limitation to any individual partner or shareholder.

The new year brings a new tax filing season. Mid-April may seem like a long time away in January but it is important to start preparing now for filing your 2011 federal income tax return.  The IRS expects to receive and process more than 140 million returns during the 2012 filing season.  Early planning can help avoid any delays in the filing and processing of your return.

Records

Initially, you will need to gather your records for 2011. A helpful jumping-off point is to review your 2010 return. Your personal situation may be unchanged from when you filed your 2010 return or it may have changed significantly.  Either way, your 2010 return is a good vantage point for assembling the materials you will need to prepare your 2011 return.

If you need a copy of your previous year(s) return information, you have several options. You can order a copy of your prior-year return. Alternatively, you may order a tax return transcript or a tax account transcript.  A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules.  However, a tax return transcript does not reflect any changes you or the IRS made after the return was filed. A tax account transcript shows any later adjustments you or the IRS made after the tax return was filed. 

If you changed your name as a result of marriage or divorce since you filed your 2010 return, you must advise the IRS. Your name as it appears on your return needs to match the name registered with the Social Security Administration. A mismatch will likely delay the processing of your return.

Forms W-2

Many taxpayers cannot begin preparing their 2011 income tax returns until they have their Forms W-2, Wage and Tax Statement. Employers have until January 31, 2012 to send you a 2011 Form W-2 earnings statement.  If you do not receive your W-2 by the deadline, contact your employer. If you do not receive your W-2 by mid-February, contact the IRS.  You still must file your return or request an extension to file even if you do not receive your Form W-2. In certain cases, you may be able to file Form 4852, Substitute for Form W-2, Wage and Tax Statement.

Filing deadline

April 15, 2012 is a Sunday. Returns would normally be due the next day, April 16, 2012. However, April 16 is a holiday in the District of Columbia (Emancipation Day). As a result, the due date for 2011 returns is April 17, 2012.  If the mid-April tax deadline clock runs out, you can get an automatic six-month extension of time to file through October 17. However, this extension of time to file does not give you more time to pay any taxes due.  To obtain an extension, you need to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

Casualty losses

Many taxpayers experienced family, business and personal losses from hurricanes, tropical storms, wild fires, floods, and other natural disasters in 2011.  For federal tax purposes, a casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a hurricane, tornado, fire, or other disaster.

Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally-declared disaster, you can choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened. This means you can deduct a 2011 loss on your 2011 return or amended return for that preceding tax year (2010).   If you have any questions about a casualty loss, please contact our office.

Retirement savings

Just because the calendar moved from 2011 to 2012 doesn’t necessarily mean you missed out on contributing to a retirement savings plan. You can contribute up to $5,000 to a traditional IRA for 2011 and you can make the contribution as late as April 17, 2012. However, if you or your spouse is covered by an employer retirement plan, this will affect how much, if any, of your contribution is tax deductible.  Individuals age 50 and older may qualify for a catch-up contribution of $1,000 on top of the $5,000 maximum.  Different rules apply to other types of retirement savings plans.  Our office can review these rules in detail with you.

IRS Fresh Start Initiative

In 2011, the IRS announced a new program, called the Fresh Start Initiative, to help distressed taxpayers. The IRS adjusted its lien policies, increased the dollar threshold when liens are generally issued, made it easier for taxpayers to obtain lien withdrawals, and extended the streamlined offer-in-compromise program.  Previously, the IRS had given its employees greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances where a taxpayer has recently lost a job, is relying solely on Social Security, or is paying significant medical bills.

If you are experiencing hardship, the most important thing you can do is to remain in compliance with your tax obligations. If you owe back taxes, now is the time to pay them, if possible, or enter into an installment agreement, if you qualify, with the IRS. The IRS wants to see you making a good faith effort to pay your taxes.

Tax law changes

Along with assembling records and reviewing activities in 2011, it’s a good idea to review some of the tax law changes in 2011 that may affect your return.  Our office can review your 2010 return and see which areas may have been affected by tax law changes for your 2011 return.  In some cases, popular tax incentives that were available in 2010 were extended into 2011. You don’t want to miss out on any available tax breaks.

If you have any questions about preparing for the 2012 filing season, please contact our office.

As 2012 gets underway, Congress has extended the employee-side payroll tax cut but a laundry list of tax incentives have expired and their renewal is in doubt.  The fate of these incentives, along with the Bush-era tax cuts, will dominate debate in Washington D.C. in 2012.  At the same time, tax planning in a time of uncertainty appears to have become the new normal.

Payroll tax cut

The Temporary Payroll Tax Cut Continuation Act of 2011, approved by Congress on December 23 and signed by President Obama the same day, extends the 2011 payroll tax holiday through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the period January 1, 2012 through February 29, 2012 (10.4 percent for self-employment income). The new law also includes a recapture provision for certain individuals.  However, the House Ways and Means Committee reported that the recapture provision will only apply if the payroll tax reduction is not extended for the remainder of 2012.  Lawmakers are expected to extend the employee-side payroll tax cut through the end of 2012, although not before difficult negotiations.

One speed bump to extending the payroll tax cut through the end of 2012 is its cost. The two-month extension is paid for by increasing certain fees charged to mortgage lenders.  A full-year extension will require additional offsets (unless Congress decides not to offset an extension). Lawmakers are reportedly discussing additional revenue raisers, such as unspecified changes to the S corporation rules and the closing of a loophole for corporate jets.  Other revenue raisers reportedly under consideration are repeal of certain oil and gas preferences and repeal of the last-in, first-out (LIFO) method of accounting.  A variety of spending cuts are also on the table.

Extenders

After December 31, 2011, many popular but temporary tax breaks expire.  The incentives, which are known as “extenders,” impact individuals and businesses.  Some of the more popular individual extenders are the state and local sales tax deduction, the higher education tuition deduction, and the teachers’ classroom expense deduction.  For businesses, the research tax credit is one of the most important extenders. 

One immediate change that many taxpayers will notice is a drop in transit benefits.  In 2011, commuters benefitted from more generous transit benefits.  The 2011 monthly limit on the tax benefit for transit and vanpools of $230 per month reverts to $125 per month in 2012. However, the monthly limit for qualified parking provided by an employer to its employees for 2012 will increase to $240, up $10 from the limit in 2011.

Several bills have been introduced in Congress to extend the expiring incentives. However, the bills have languished in committee. One reason for the lack of movement is that Congress can extend the incentives in 2012 and make them retroactive to January 1, 2012.  The extenders are also separate from the temporary Bush-era tax cuts, which are scheduled to expire after December 31, 2012.  Many lawmakers do not want to link the extenders to the more-controversial Bush-era tax cuts.

IRS budget

One bill that did pass Congress at year-end 2011 was a fiscal year 2012 budget for the IRS.  Congress voted to cut $305 million from the IRS’s FY 2012 budget.  How this cut will impact IRS operations is unknown. In November 2011, the IRS offered buyouts and early outs to back-office employees to reduce its greatest expense: employee payroll.  The IRS could also delay some business systems modernizations to save money.  The IRS will likely keep customer service as close as possible to full funding, especially during the busy 2012 filing season.

Tax planning

One of the most significant challenges to long-term tax planning is the on-again, off-again nature of many tax incentives.  Temporary incentives, such as the research tax credit and the state and local sales tax deduction, have become de facto permanent incentives because they are regularly extended.   Nonetheless, they are temporary. Because of their temporary nature, taxpayers must have two tax plans: one that takes into account an extension of the incentives, and a second plan that does not.

If you have any questions about tax planning and tax legislation in 2012, please contact our office.

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, requires certain U.S. taxpayers to report their interests in specified foreign financial assets.  The reporting requirement may apply if the assets have an aggregate value exceeding certain thresholds. The IRS has released Form 8938, Statement of Specified Foreign Financial Assets, for this reporting requirement under FATCA.

Reporting

For now, only specified individuals are required to file Form 8938, but specified U.S. entities will eventually also have to file the form. Taxpayers who do not file a federal income tax return for the year do not have to File Form 8938, even if the value of their foreign assets exceeds the normal reporting threshold.

Individuals who have to file Form 8938 include U.S. citizens, resident aliens for any part of the year, and nonresident aliens living in Puerto Rico or American Samoa.

Reporting applies to specified foreign financial assets. Specified foreign financial assets include:

• A financial account maintained by a foreign financial institution;
• Other foreign financial assets, such as stock or securities issued by a non-U.S. person, or an interest in a foreign entity.

The aggregate value of the individual’s specified foreign financial assets must exceed specified reporting thresholds, as follows:

• Unmarried U.S. taxpayers, and married U.S. taxpayers filing a separate return – more than $50,000 on the last day of the year, or more than $75,000 at any time during the year;
• U.S. married taxpayers filing a joint return – more than $100,000 on the last day of the year, or more than $150,000 at any time during the year; or
• Taxpayers living abroad: if filing a joint return, more than $400,000 on the last day of the year, or more than $600,000 during the year; other taxpayers, more than $200,000 on the last day of the year, or more than $300,000 at any time during the year.

Taxpayers who report assets on other forms, such as Form 3520, do not have to report the asset on Form 8938, but must use Form 8938 to identify other forms on which they report.

Filing

Reporting applies for tax years beginning after March 18, 2010, the date that FATCA was enacted. Most taxpayers, such as those who report their taxes for the calendar year, must start filing Form 8938 with their 2011 income tax return.

If you have any questions about Form 8938, please contact our office.

Depreciation is a reasonable allowance for wear and tear on property used in a trade or business or for the production of income. Property is depreciable if it has a useful life greater than one year and depreciates in value. Property that appreciates in value may also  depreciate if subject to wear and tear. Depreciation ends in the tax year that the asset is retired from service (by sale, exchange, abandonment or destruction) or that the asset is fully depreciated.

Assets with useful lives of one year or less can be deducted as current expenses in the year of their costs. Depreciation cannot be claimed on an asset that is acquired and disposed of in the same year.

Depreciation begins in the tax year that the property is placed in service for either the production of income or for use in a trade or business. Property generally is considered placed in service when it is in a condition or state of readiness to be used on a regular, ongoing basis. The property must be available for a specifically assigned function in a trade or business (or for the production of income).

An asset actually put to use in a trade or business is clearly considered placed in service. If, on the other hand, an asset is not actually put to use, it is generally not considered placed in service unless the taxpayer has done everything he or she can to put the asset to use. For example, a barge was considered placed in service in the year it was acquired, even though it could not be actually used because the body of water was frozen. For a building that is intended to house machinery and equipment, the building's state of readiness is determined without regard to whether the machinery and equipment has been placed in service. Leased property is placed in service by the lessor when the property is held out for lease.

Generally, the year property is placed in service is the tax year of acquisition, but it could be a later time. An asset cannot be placed in service any sooner than the time that the business actually begins to operate.

In the case of agriculture, livestock cannot be depreciated until it reaches maturity and can be used; orchards cannot be depreciated until the trees produce marketable quantities of crops. Prior to those times, costs must be capitalized and cannot be written off.

Especially at year-end, placing an asset in service before the new year can mean the difference between claiming a substantial amount of depreciation on this year's return instead of waiting a full year. If you have any questions on how to qualify a business asset under this deadline, please contact this office.