OBAMA'S TAX PROPOSAL

There are several tax provisions in President Obama's budget proposal. It is doubtful that this will pass but I thought you might be interested. If you want to read the document called General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals let me know and I will get you a copy. I will tell you it is 245 pages of "Washington Speak."

As you probably have heard the President wants the upper-incomers who are already paying most of the tax to even pay more. In 2013 (after the election) the current 33% and 35% tax brackets rates will be raising to 36% and 39.6%, respectively, and increasing the top capital gains rate to 20% in the two highest tax brackets and taxing their dividends at ordinary income rates.

That's not the only hit. The proposal would limit the tax benefit of itemized deductions to 28% for taxpayers in higher brackets and reinstating phaseouts of personal exemptions and itemized deductions from prior law. Although this is not an increase in rates, it is an increase in taxes because the amount of income is subject to tax is higher.

Another big question we have is "what is going to happen to estate taxes?" Without a law change the amount subject to estate taxes falls to $1,000,000 and the rate quickly reaches 55%. The budget propose recommends making the estate tax exemption to $3.5 million and topping the rate out at 45%.

There are other tightening proposed in Obama’s budget, but these are the major changes. Don't get excited about these proposals. None of the experts think that they will pass this year. Even so this is a good look at what might be coming in the future.

We will be keeping an eye on this for you.

1 IN 5 AMERICANS ARE DEPENDENT ON THE GOVERNMENT

The Heritage Foundation just reported that 21.8% of Americans or 67.3 million are subsidized by the government. 

PAYROLL TAX CUT EXTENDED TO THE END OF THE YEAR

The Internal Revenue Service today released revised Form 941 enabling employers to properly report the newly-extended payroll tax cut benefiting nearly 160 million workers.

Under the Middle Class Tax Relief and Job Creation Act of 2012, enacted yesterday, workers will continue to receive larger paychecks for the rest of this year based on a lower social security tax withholding rate of 4.2 percent, which is two percentage points less than the 6.2 percent rate in effect prior to 2011. This reduced rate, originally in effect for all of 2011, was extended through the end of February by the Temporary Payroll Tax Cut Continuation Act of 2011, enacted Dec. 23.

No action is required by workers to continue receiving the payroll tax cut. As before, the lower rate will have no effect on workers’ future Social Security benefits. The reduction in revenues to the Social Security Trust Fund will be made up by transfers from the General Fund.

Self-employed individuals will also benefit from a comparable rate reduction in the social security portion of the self-employment tax from 12.4 percent to 10.4 percent. For 2012, the social security tax applies to the first $110,100 of wages and net self-employment income received by an individual.

The new law also repeals the two-percent recapture tax included in the December legislation that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut. As a result, the now repealed recapture tax does not apply.

The IRS will issue additional guidance, as needed, to implement the newly-extended payroll tax cut, and any further updates will be posted on IRS.gov.

1099 QUESTION

Q: I have a question on 1099 forms. There are a couple people looking for their 1099’s from the place where we work, but they have never prepared them in the past. Do they need to?

A: Here are the 1099 rules:

·         First of all, all businesses are required to file 1099’s to a person or a business (that is not incorporated) for any services that are provided of $600 or greater during the calendar year. 

·         Also, the same would be true for a business paying rent to a person or a business that was not incorporated. 

Starting this year the IRS has added additional questions to all tax returns. 

They are:

1.    Are you required to file form(s) 1099’s?                   yes or no

2.    If yes, are you or will you be filing form(s) 1099’s?  yes or no

These are questions that we will need to answer every year on all returns. 

I must warn you, if you should be chosen for audit they will be looking to make sure that you filed your 1099’s.  The fine for not filing is really high.  They can fine the business $250 per 1099 that was not filed.  So for example, if a business was required to prepare 10 1099’s and did not and the auditor goes back 3 years (and the same number of 1099’s were required then),  they could actually access $2500 (10 x $250)  x 3 years or $7500 in penalties just for not filing 1099’s.

Also, it is recommended that anybody you pay as a contractor or anybody for any type of service, you are required to have the contractor / person fill out a Form W-9 and sign.  This is basically paperwork that says you do not have to withhold backup withholding.  It would be a good practice to obtain these forms and keep in your permanent records.  You do not have to file them with the IRS. 

The following is a link to the IRS website, where you can download and print the form W-9.

If you have any questions, please feel free to contact us. 

MY DAD WAS WRONG

I remember when I was a high school student my dad told me that I had a choice as I selected a career.  I could work for the private sector or I could work for the government.  He said that the government workers were pretty much guaranteed that they would not lose their job and they had a really good pension plan but that was offset by the fact that they were not paid as well. 

Little did he know how things would change.  Now they have job security, a good pension and are paid better.

TheHill.com reports that "the Congressional Budget Office found Monday that federal workers are compensated 16% more than comparable private-sector workers on average. ... For those with only a high-school degree, workers earned 21% more and were given benefits worth 72% more than in the private sector."  For federal workers with a college degree, "wages were about the same but benefits were 46% better in the government."  According to the story, "President Obama's 2013 budget request, due to be sent to Congress on Feb. 13, will ask for a 0.5% cost-of-living raise for workers."

To read more of this article: READ MORE

IRS RELEASES THE DIRTY DOZEN TAX SCAMS FOR 2012

Please check out the latest tax scams issued by the IRS:  READ MORE

FEDERAL SUBSIDIES FUEL COLLEGE COSTS

Dr Gross is a professor of economics at Creighton University in Omaha, Nebraska.  He publishes a monthly Economic Trends Newsletter.  I found his comments regarding education costs quite interesting.  Note that at the end he asks at the end of the article if the government is creating another housing type bubble by their legislative actions?  

Federal Subsidies Fuel College Costs  Up 5 Times Inflation Rate

Since 1981, U.S. Bureau of Labor Statistics data show college tuition and fees have soared by 714.3 percent while all other items consumed by the average household increased by a more moderate 141.0 percent.

Reacting to this shocking trend, President Obama, in his State of the Union address, threatened higher educational institutes with sanctions if they continued to boost tuition at this alarming rate. Contrary to the President's rhetoric, the federal government, by increasing federal financial assistance by almost 20 percent since 2009, has been one of the chief culprits allowing colleges to shift a large share of rising costs to the taxpayer.

Moreover, the President boosted the federal "bailout" or subsidization of higher education by: 

1. Allowing borrowers to cap their student loan payments at 10 percent of discretionary income and waiving any loan balance remaining after 20 years.
2. Doubling the number of work-study jobs available.
3. Implementing the American Opportunity Tax Credit which provides up to $10,000 for four years of college. 
4. Asking Congress to subsidize record low student loan interest rates.  

Despite rapidly rising federal support, colleges have increased the share of courses taught by part-time faculty to 49 percent in 2009 from 34 percent in 1981. Furthermore, colleges raised average faculty salaries by a scant 2.7 percent per year over the past six years.  

During this same period of time, the growth rate in outlays for student services (e.g. athletics, counseling) was almost double that of expenditures for instruction.  

Data show that colleges have used federal government support to underwrite a disproportionate growth in funds for non-academic spending and a sharp increase in tuition and fees.There is a strong correlation over time between student and parent loan availability and rapidly rising tuitions.  

Similar to housing, the federal government is putting air in another bubble - this time it is higher education.  

LATEST ON PAYROLL TAX CUTS

(The Hill) -- TheHill.com reports House Speaker John Boehner said yesterday "that lawmakers have 'an agreement in principle' to extend the payroll tax cuts, unemployment benefits and the Medicare 'doc fix,' but cautioned that 'there are a lot of details that have yet to be worked out.'"  GOP leaders hope for "a House vote by the end of the week," but "some rank-and-file Republicans have decried the idea of adding $100 billion to the deficit."

To read more on this article: CLICK HERE

CHANGES IN THE TAX CODE

Several years ago one of my son’s said that he was thinking about becoming an accountant.  I told him that it was a good profession and listed the advantages and disadvantages.  One of the advantages was that you have to keep learning because things keep changing all the time. 

Here is an example:
I just read a report stating that there have been 4,428 changes have been made to the 3.8 million-word code over the past 10 years, including an estimated 579 changes in 2010 alone.  See why the tax structure is so confusing?  That is why Kopsa Otte spends thousands of dollars and hundreds of hours each year reeducating ourselves.

By the way, my son decided to open a Arby’s restaurant.  Roast beef does not change every year.

FICA TAX ON TIPS

A new program has been announced by IRS that uses data from employees' Forms 4137, Social Security and Medicare Tax on Unreported Tip Income, to determine the employer's share of FICA taxes on unreported tips.

Employees use Form 4137 to report and pay their share of Social Security and Medicare taxes (FICA taxes) on tips that they did not report to their employer.

The IRS believes that employers in industries where tipping is common know that they must pay the employer's share of FICA taxes on tips that employees report to them. However, IRS feels that many employers do not realize that they may be liable for these taxes on tips employees do not report to them.

Employers are subject to FICA tax on unreported tips. An employer's liability for its share of the FICA taxes on unreported tips does not arise until it receives a Notice and Demand from IRS which instructs the employer to include the FICA taxes shown on the notice and demand on the employer's next Form 941, Employer's Quarterly Federal Tax Return. An employer will not be subject to any interest charges or deposit penalties if it properly reports the taxes as instructed in the notice and demand, and remits the tax due with its Form 941, or if it timely makes a deposit that is required to be made in accordance with the notice instructions.

In the past, IRS issued notice and demands based on tip audits using estimates, including data from Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. Under the new initiative, the Notice and Demand will be based on information that IRS collects from employees' Forms 4137.

IRS generally intends to notify an employer at least 30 calendar days in advance of the issuance of a Notice and Demand by issuing a pre-notice. IRS has a designated staff to help resolve any discrepancies that are noted by employers on the pre-notice.

Observation: I have yet to see any of these new notices. If by chance you were unlucky enough to receive one please let me know. I am interested on how the IRS is actually handling this.

ACCORDING TO THE IRS THE TOP 1% PAY MORE IN TAX THAN THE OTHER 93% COMBINED

A QUESTION ON THE 2013 OBAMA CARE 3.8% MEDICARE SURTAX

A few people have asked me about the 3.8% Medicare surtax that starts after 2012. This is the tax that was created by Obama Care. One recurring question is, “Will there be an additional tax of 3.8% when I sell my personal residence?” Apparently the blogs or some news reports have stated that there will be an additional tax when you sell your home. The good news is that the surtax won’t apply to all home sale profits after 2012. Most gains on sales of primary residences will be exempt. Only the portion of profits that exceeds the $250,000 or $500,000 exclusion will be subject to the tax.

Additionally, only higher income taxpayers will be subject to the tax. For now, the tax only will apply to singles with adjusted gross incomes over $200,000 or joint filers with AGIs above $250,000.

Here is a brief overview of the tax that comes into place after 2012: The 3.8% surtax is levied on the smaller of the filer’s net investment income (including taxable capital gains) or the excess of the taxpayer’s adjusted gross income over the threshold amounts. This will include profits on sales of rental properties and second homes, assuming that the adjusted gross income is large enough.

DEADLINE COMING UP FOR FLEX PLANS

A deadline for many flex plan participants is coming up.  The 2011 set-asides must be used by March 15 if the plan uses IRS’ 2½-month grace period.  Any funds left over are forfeited. The deadline for other FSAs was Dec. 31, 2011.

Remember that after this year, the ceiling on FSA set-asides will drop to $2,500.

THE IRS WARNS OF REFUND DELAYS

Last week the Internal Revenue Service warned that tax refunds could be delayed a week this tax season because of new anti-fraud safeguards.

“The IRS has opened its filing season successfully this month, and refunds have started going out to many taxpayers,” the agency said in an email to tax professionals. “As with the start of any tax season, there are system validations that occur requiring some fine-tuning of our systems. As part of this, some taxpayers will receive refunds approximately one week later than initial projections they may have received, but these are still in line with historical refund delivery times.”

The IRS noted that the one-week delay is related to the fine-tuning of IRS systems to adjust for new safeguards that were put in place this tax season to provide for stronger protection against tax refund fraud. The agency has come under heavy criticism for the increasing number of identity theft cases related to tax refunds, and it recently added more stringent measures.

The IRS said it is providing additional screening for fraud this year before issuing refunds, but the vast majority of taxpayers can still continue to expect to receive their refunds in a timely fashion.

The IRS also noted that the refund time frames provided by the “Where’s My Refund” tool on its Web site are projected time frames and are subject to revision. “Many different factors can affect the timing of the refund after the IRS receives the return for processing,” said the agency. “The IRS apologizes for any inconvenience caused by the revised refund dates.”

The IRS promised that the delay only affects some early filers, and taxpayers whose returns were accepted by the IRS on or after January 26 would not experience the delay.

I CAN’T GET A W-2, NOW WHAT DO I DO?

Q.  A company that I worked for is now defunct and I don’t expect to get a W-2.  What do I do?

A. The short answer is file your return with a Form 4852, Substitute for Form W-2, Wage and Tax Statement.

Here is what is on the IRS web site dealing with your problem. 

 If you haven’t received your W-2, the IRS recommends that you follow these four steps:

1. Contact your employer  If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed.  If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address.  After contacting the employer, allow a reasonable amount of time for them to resend or issue the W-2.

2. Contact the IRS  If you do not receive your W-2 by Feb. 14, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, Social Security number, phone number and have the following information:

•  Employer’s name, address and phone number

•  Dates of employment

•  An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2011. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

3. File your return  You still must file your tax return or request an extension to file by April 17, 2012, even if you do not receive your Form W-2. If you have not received your Form W-2 in time to file your return by the due date, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible.  There may be a delay in any refund due while the information is verified.

4. File a Form 1040X  On occasion, you may receive your missing W-2 after you file your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Form 4852, Form 1040X and instructions are available on this website or by calling 800-TAX-FORM (800-829-3676).