Uniform state nonresident taxation rule reintroduced in Congress

Federal legislation has been reintroduced in Congress that would allow all States to tax the wages earned by nonresident employees who are present and performing employment duties in the State for more than 30 days in a year [H.R. 1864]. Sounds ok so far right? Read on.

Nonresident taxation rules are not currently uniform across states. Some states tax nonresidents if they perform one day of service in the state. Hawaii, on the other hand, doesn't require withholding if services aren't performed in the State for more than 60 days during the year. The new legislation would reduce some of the complexity in these rules. Reducing complexity? Since when has the FEDERAL Government ever been capable of reducing complexity? Here comes the gotcha...

The legislation is called the “Mobile Workforce State Income Tax Simplification Act of 2011.” The bill would allow a nonresident State to tax all of the wages and remuneration earned by the employee in that State from day one once the employee reaches the “more than 30 day threshold.” The employee's earnings would also be subject to taxation in his resident State. The provisions of the bill would not apply to professional athletes and entertainers, and to “certain public figures,” who are defined as “persons of prominence who perform services for wages or other remuneration on a per-event basis, provided that the wages or other remuneration are paid to such person for services provided at a discrete event in the form of a speech, similar presentation or personal appearance.” So if you work in Colorado for 4 months, get laid off, move to Wisconsin and work the last six months of the year you could be taxed for ALL of your income earned that year in BOTH states instead of a prorated amount based only on the time in each state. Sounds simple to me but also very expensive.

Since the mechanics of the bill are identical to a bill issued in 2009 that never came to a vote in the House or Senate it sounds like a good time to call your representatives and let them know you thoughts. The bill would take effect on Jan. 1, 2013, if it is signed into law.

Surprise, surpirise...New tax laws

While you were sleeping... or actually while you were putting together your tax information this past quarter there were over 160 new changes to the tax law. The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Detailed guidance on new law's 100% bonus depreciation allowance. The IRS has issued detailed guidance on the 2010 Tax Relief Act's 100% bonus depreciation rules for qualifying new property generally acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012. Overall, the rules are quite generous. For example, they permit 100% bonus depreciation for components where work on a larger self-constructed property began before Sept. 9, 2010, allow a taxpayer to elect to “step down” from 100% to 50% bonus depreciation for property placed in service in a tax year that includes Sept. 9, 2010, permit 100% bonus depreciation for qualified restaurant property or qualified retail improvement property that also meets the definition of qualified leasehold improvement property, and provide an escape hatch for some business car owners who would otherwise be subject to a draconian depreciation result.

New law creates a 100% write-off for heavy SUVs used entirely for business. Under the 2010 Tax Relief Act, a taxpayer that buys and places in service a new heavy SUV after Sept. 8, 2010 and before Jan. 1, 2012, and uses it 100% for business, may write off its entire cost in the placed-in-service year. A heavy SUV is one with a GVW rating of more than 6,000 pounds.

IRS further delays health insurance coverage information reporting for small employers. The new health reform legislation generally requires employers to report the cost of health insurance they provide to employees on their W-2 forms. Last fall, the IRS made this new reporting requirement optional for all employers for the 2011 Forms W-2. More recently, the IRS announced that the reporting requirement will continue to be voluntary for small employers at least through 2012.

New settlement offer for those voluntarily disclosing unreported offshore income. The IRS has announced a second voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. It will be available through Aug. 31, 2011. The IRS released details of the new voluntary offer, called the 2011 Offshore Voluntary Disclosure Initiative (OVDI), in the form of 53 frequently asked questions (FAQs). As with the first offer, participants have to pay back taxes and penalties but will avoid criminal prosecution. The offshore penalty is different under the new offer. The general rule is that the penalty is 25% based on amounts in foreign bank accounts, but can be as low as 12.5% or 5% for some taxpayers.

IRS eases lien procedures. The IRS has announced new policies and programs to help taxpayers pay back taxes and avoid tax liens. Its goal is to help individuals and small businesses meet their tax obligations, without adding an unnecessary burden to taxpayers. Specifically, the IRS is:
• Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.
• Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
• Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.
• Creating easier access to Installment Agreements for more struggling small businesses; and
• Expanding a streamlined Offer in Compromise program to cover more taxpayers.

Lactation expenses now qualify as deductible medical expenses. Reversing its prior position, the IRS has announced that expenses paid for breast pumps and supplies that assist lactation qualify as deductible medical expenses. Amounts reimbursed for these expenses under FSAs (flexible spending accounts), Archer MSAs (medical savings accounts), HRAs (health reimbursement arrangements), or HSAs (health savings accounts) are accordingly not income to the taxpayer.

Tax consequences of governmental homeowner-assistance payments. The IRS has explained the income tax and information return consequences of payments made to or on behalf of homeowners under various government programs designed to prevent avoidable foreclosures of homeowners' homes and stabilize housing markets. In general, homeowners may exclude the payments from income, and may deduct all payments they actually make during 2010–2012 to the mortgage servicer, HUD (the Department of Housing and Urban Development), or the State HFA (housing finance agency) on the home mortgage. The aid payments aren't subject to information reporting, and there are transition rules for payments that are incorrectly reported.

Courts differ over whether basis overstatement can trigger 6-year limitations period under new regulations. Late last year, the IRS issued final regulations under which an understated amount of gross income reported on a return resulting from an overstatement of unrecovered cost or other basis is an omission of gross income for purposes of the 6-year period for assessing tax and the minimum period for assessment of tax attributable to partnership items. The 6-year limitations period applies when a taxpayer omits from gross income an amount that's greater than 25% of the amount of gross income stated in the return. Several courts had held that a basis overstatement is not an omission of gross income for this purpose. In response to these decisions, the IRS issued the new regulations to clarify that an omission can arise in that fashion. Now, some Courts have addressed the regulations. The Court of Appeals for the Fourth Circuit and the Tax Court have rejected the regulations. On the other hand, the Federal Circuit has upheld them and the Seventh Circuit has viewed them favorably. As a result, it looks like the Supreme Court will ultimately have to resolve the issue.

New deadline for electing modified carryover basis rules. Estates of decedents dying in 2010 can choose zero estate tax, but at the price of beneficiaries being limited to the decedents' basis plus certain increases. The IRS has announced that Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, is not due Apr. 18, 2011 and should not be filed with the final Form 1040 of persons who died in 2010. The IRS says the due date will be set in forthcoming guidance but does not indicate when that guidance may be issued. The forthcoming guidance will also explain the manner in which an executor of an estate may elect to have the estate tax not apply for a decedent dying in 2010.

Another Appeals Court upholds IRS's time limit on spousal relief requests. Married joint return filers are jointly and severally liable for the tax arising from their returns. Innocent spouses may request relief from this liability in certain circumstances. An IRS regulation states that a request for equitable innocent spouse relief must be no later than two years from the first collection activity against the spouse. The Tax Court had found this regulation invalidly imposed a time limit. However, the Court of Appeals for the Third Circuit has reversed the Tax Court and upheld the regulation (so has the Court of Appeals for the Seventh Circuit).

Business expenses of professional gamblers not limited. Gambling losses may be deducted only to the extent of gambling winnings, even in the case of an individual engaged in the trade or business of gambling. Previously, the Tax Court had held that losses for purposes of the limitation included both the cost of wagers and business expenses. Earlier this year, the Court overruled its prior position and now says that a professional gambler's business expenses are not subject to the loss limitation.

Physician statement alone doesn't establish financial disability to toll limitations period. In general, a taxpayer must file a claim for credit or refund of tax within three years after filing the return or two years after paying the tax, whichever period expires later. (Code Sec. 6511(a)) However, the statute of limitations is suspended for certain taxpayers who are unable to manage their financial affairs because of a medically determinable mental or physical impairment. A physician's statement must be submitted to claim this relief, but a Court has made clear that the statement alone doesn't establish that the taxpayer was financially disabled. Thus, it allowed the IRS to seek additional proof of the taxpayer's condition.

We hope you find this information helpful for 2011 tax year planning.

Audit triggers to watch out for

Running a close second as to the most popular questions I get is " Will this raise a red flag with the IRS?" What most people don't know is that there are many more audits being conducted without you knowing your beng audited. As more regulations hit the books requiring electronic reporting more information is being gathered about you at the IRS. Brokerage firms are reporting your interest, dividends and stock sales, mortgage companies are reporting mortgage interest, real estate taxes, points and mortgage interest premiums. And the IRS is matching these items up.

Additionally, the IRS has compiled information over many years and has developed averages for many deductions based on income levels. If a return includes deductions too far outside the norms it could get a little extra attention. So here are a few items that will trigger red flags at the IRS:

1. Failure to include ALL of your 1099s like interest, dividends and the like. With the matching up of outside data this is a surefire way to get "fan mail" from the IRS.

2. Larger than normal home office deductions. The IRS thinks this is one of THE most abused deductions taken. As more and more people take contract jobs they look for all the deductions they can get. Everyone should take any legitimate deduction but on this one don't go overboard.

3. Too many losses for your side businesses. The IRS expects any business to show a profit at least 2 in every 5 years. If you can't do that then it is possible they will consider that activity a hobby and disallow your losses.

4. Extra large charitable contributions. Make sure you keep your receipts for any cash contributions. For those non-cash donations to your favorite charity keep a list of every item and it's condition at the time of the donation. Better still there are programs available that assign a value to most of the items donated and will keep track of it for you.

5. Too many round numbers. The IRS is somewhat averse to estimates. The term "Ballpark" is not in the code.

6. Rental real estate losses when you do not activly participate in the management of the property.

7. Extra large unreimbursed employee business expenses.

As I have posted on Facebook before the IRS is targeting self-employed individuals these days so for you mavericks out there all the above is in play plus some. When in doubt documentation is paramount. Better to keep up with those mileage logs all along than to try to create one a couple of years later.

Where is my refund???

How many times I get this question is unknown but let's just say it is a bunch. Taxpayers who have filed a federal tax return and are entitled to a refund have several options to check on the status of their refund. I am not one of them. The IRS says the fastest and easiest way to check on the status of a refund is to access “Where's My Refund?” on the agency website. If a taxpayer e-files, refund information becomes available 72 hours after IRS acknowledges receipt of the return. If a paper return is filed, refund information will generally be available three to four weeks after mailing the return. When checking on the status of a refund, you must enter either a Social Security number or an Individual Taxpayer Identification Number, filing status, and the exact whole dollar refund amount shown of the tax return. As described by IRS, once the personal information is entered, several responses are possible, including: acknowledgment that the return was received and is in processing; the mailing date or direct deposit date of the refund; or notice that IRS could not deliver the refund due to an incorrect address or incorrect direct deposit information. If you file a joint return with your spouse you must use a joint bank account for direct deposit.

Also, don't be surprised if you don't find anything referencing your return within the time frame mentioned this year. The IRS is runnung behind on everything this year purportedly due to the late tax changes inacted by Congress in December of last year.

Deductions for kids

Your children may help you qualify for some tax benefits. Here are 10 tax benefits parents should consider when filing their tax returns this year.

1. Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
2. Child Tax Credit You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit.

3. Child and Dependent Care Credit You may be able to claim the credit if you pay someone to care for your child under age 13 so that you can work or look for work.

4. Earned Income Tax Credit The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund.
5. Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. Taxpayers claiming the adoption credit must file a paper tax return because adoption-related documentation must be included.

6. Higher Education Credits Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income.

7. Student loan Interest You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions.
8. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage after March 29, 2010, for any child of yours who was under age 27 at the end of 2010, even if the child was not your dependent.

9. Contract labor If you're self-employed it is usually a good tax strategy to pay your kids. This works especially well for those in higher tax brackets where there is no credit or deduction for higher education expenses.

10. Unearned income allocations If you operate out of an LLC, Limited Partnership or S-Corp showing kids as owners / managers may help in diverting income away from self-employment tax.

Itemized deductions - taxes

Moving down the list of itemized deductions our next topic is deductible taxes. Deductible taxes include:

1. State, local or foreign real property taxes,
2. State or local personal property taxes,
3. State, local or foreign income, war profits or excess profits taxes,
4. Generation-skipping transfer tax imposed on income distributions,
5. State and local general sales tax (in liew of state and local income tax),
6. State or local sales taxes on the purchase of new automobiles, boats, aircraft and other special items.

As an individual taxpayer you are considered a cash basis taxpayer and as such these taxes are only deductible in the year you actually pay them. Additionally there are special rules for the deduction for the sales tax imposed on new motor vehicles. Only sales tax on the first $49,500 of the purchase price is allowed and only on vehicles whose gross vehicle weight is less than 8500 pounds. Also the deduction begins to phase out for a taxpayer whose adjusted gross income is over $125,000 ($250,000 for marrieds). When figuring you sales tax deduction using the IRS - provided table remember to add a proporionate share of local sales taxes to the total since the table only uses the state rate in their calculation. Next itemized installment will be on deductible interest.

On January 25, Senate Finance Committee Chairman Max Baucus (D-MT) and Senate Majority Leader Harry Reid (D-NV) introduced a bipartisan bill that would repeal the new Form 1099 reporting requirements for businesses. The bipartisan legislation would repeal requirements for businesses to report payments made for goods and certain services to IRS using Form 1099. As businesses have become aware of the new paperwork requirements, they've raised concerns about the resources that would be required to complete the forms when they would need to begin doing so in January 2012.
In general, under current law, information returns must be made to IRS by every person engaged in a trade or business who makes payments for services, aggregating $600 or more, in any tax year to another person (other than corporations) in the course of the payor's trade or business. This includes passive rental activities just to be on the safe side. Effective for payments made after 2011, Sec. 9006 of the Patient Protection and Affordable Care Act would add payments of amounts in consideration for property and gross proceeds—i.e., it would add payments for goods—to the list of payments subject to reporting. In addition, it provides that starting in 2012, payments to corporations (that are not tax-exempt)—which had previously been exempt from the reporting requirement—would be subject to information reporting.
Baucus had previously introduced legislation to repeal the Form 1099 reporting requirements during the 111th Congress in November 2010. In last night’s State of the Union address, President Obama expressed his support for fixing this “flaw” in health care reform legislation which “placed an unnecessary booking burden on small businesses”.

Itemized deductions - Medical expenses

Deductible medical expenses can include not only the expenditures made on behalf of the taxpayer but also the spouse and all dependents listed on the return. When submitting your medical expenses to your tax preparer they should be organized as follows:

Medicine and drugs;
Fees paid to doctors, dentists, and medical professionals;
Hospital and laboratory fees;
Medical transportation and lodging;
Medical supplies;
Medical insurance premiums other than those described below;
Other, including medical equipment and maintenance of that equipment.
Number of miles used for medical-care-related purposes.
Reimbursements (e.g., from insurance

Throughout the years many court cases have determined whether an expense was deductible as a medical expense. The following is a list of expenses that have been approved but it is not intended to be all inclusive. I’m sure you will find some surprises in the list so make sure you read all the way through.
Abortion (legal)
Acupuncture
Air conditioner
- Allergy relief
- Cystic fibrosis relief
Alcoholism & drug addiction, treatment of
Ambulance
Attendant to accompany blind or deaf person
Birth control pills
Excess cost of Braille books and magazines
Service animals
Special education for the blind
Home modifications for handicapped including elevator
Extra equipment for auto to accommodate wheelchair
Childbirth prep classes
Chiropractors
Christian Science treatment
Clarinet and lessons to correct teeth malocclusion
Computer for the storage and retrieval of medical records
Contact Lenses and replacement ins.
Prescription contraceptives
Cosmetic surgery to fix a deformity, injury or disease
Crutches
Hearing aids
Dentists
Dentures
Diagnostic fees
Diapers used to treat severe neurological disease
Doctors
In home nurse
Dyslexia language training
Eye exam and glasses
Fertility enhancement
Halfway house (adjustment to mental hospital)
Health club dues if prescribed by a physician
HMO
Hospital services
Indian medicine man (yes Tonto)
Insulin
Medical insurance
Iron lung
Lab fees
Laser eye surgery
Legal expenses relating to mental illness
Prepaid lifetime medical care, retirement home
Artificial limbs
Lodging limited to $50 per night
Long term care
Nursing homes
Orthodontia
Osteopaths
Oxygen equipment
Special plumbing fixtures for handicapped
Prosthesis
Psychiatric care
Psychologists
Psychotherapist
Lazy Boy for cardiac patient
Reconstructive Breast surgery
Schools for the handicapped
Treatment for sexual dysfunction
Stop smoking programs
Legal sterilization
Swimming pool for the treatment of polio or arthritis
Taxicab to Dr.s office
Closed caption decoder
Mileage
Transplants
Certain weight loss programs
Wheelchairs
Wigs that alleviate mental discomfort from disease
X-rays

New tax law changes passed in the 4th qtr 2010

While the new law tax changes in the bipartisan legislation that was enacted in late 2010 were the most significant developments in the fourth quarter of 2010, many other tax developments may affect you, your family, and your livelihood. These other key developments in the fourth quarter of 2010 are summarized below. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Final regulations on stock reporting rules. The IRS has issued final regulations explaining the complex basis and character reporting requirements that apply for most stock acquired after 2010, for shares in a regulated investment company (i.e., a mutual fund) or stock acquired in connection with a dividend reinvestment plan after 2011, and for other specified securities acquired after 2012. In brief, brokers will have to report to the IRS the customer's adjusted basis (cost for tax purposes) in the security and whether any gain or loss is short- or long-term. When these rules are fully implemented, the IRS will be in a much better position to monitor whether taxpayers are properly reporting investment gains and losses.

More guidance on the small business health care credit. The IRS issued a second wave of detailed guidance on the small employer health insurance credit created by last year's health reform legislation. For tax years beginning after Dec. 31, 2009, an eligible small employer (ESE) may claim a tax credit for nonelective contributions to purchase health insurance for its employees. An ESE is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000. And, in general, the ESE must pay not less than 50% of the premium cost of the employee health plan. The IRS also issued the final version of Form 8941 (Credit for Small Employer Health Insurance Premiums), which is used to claim the credit.

Medical residents do not qualify for FICA student exception. Under the so-called student exception, FICA doesn't apply to students' work for a college if they are regularly enrolled in and attending classes at the college. The Supreme Court has upheld the validity of IRS regulations that generally prevent medical residents from qualifying for the FICA student exception. Under these regulations, an employee for FICA purposes includes a medical resident who works 40 hours or more per week for a school, college or university. This decision has important ramifications for the many teaching hospitals and their residents.

Electronic funds transfer (EFT) rules now in place. Beginning Jan. 1, 2011, employers must use EFT to make all federal tax deposits (such as deposits of employment tax, excise tax, and corporate income tax). Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be used after Dec. 31, 2010.

Standard mileage rates up. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 51¢ per each business mile traveled after 2010. That's 1¢ more than the 50¢ allowance for business mileage during 2010. Further, the 2011 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 19¢ per mile, 2.5¢ more per mile than the 16.5¢ for 2010.

More interest deductions for debt on the purchase of an expensive home. A taxpayer can deduct interest on up to $1.1 million of the debt securing the purchase of his principal residence.

Withholding on government payments delayed. For payments made after Dec. 31, 2011, governments at the federal, state and local levels will have to deduct and withhold tax in an amount equal to 3% of any payments they make to a person providing property or services. However, the IRS has announced that withholding and reporting requirements will not apply to any payment made by payment card, including credit cards, debit cards, and stored value cards, for any calendar year beginning earlier than at least 18 months from the date further guidance on this subject is finalized. Thus, the new requirements will not apply to payment card payments for the 2012 calendar year.

New law delays start of filing season for some taxpayers. Some taxpayers planning to file their 2010 tax returns early have been advised by the IRS to wait until mid- to late-February, 2011. Affected taxpayers are those planning to file Schedule A or claim above-the-line deductions for higher-education tuition and fees or educator expenses. The culprit is Congress's late passage of the 2010 Tax Relief Act. The IRS needs time to reprogram its computers to reflect the changes.

Extended due date this year. Because of the Emancipation Day holiday in the District of Columbia, the due date of Form 1040 for 2010 is Apr. 18, 2011, instead of Apr. 15, 2011. The Apr. 18 due date applies even for taxpayers who do not live in the District of Columbia.

Itemized Deductions

Most people want to make more money without necessarily paying more taxes. We will leave the making more money part up to you but we can help with the paying less taxes part. Usually this means finding more deductions.

As the first installment in this series we need to set things up. A little history and a few definitions can go a long way in understanding how to decrease your tax burden when the filing deadline arrives. Probably the first item to mention is “adjusted gross income”. This is the last number on the first page of your Form 1040. It is the net result of subtracting from all your items of income (wages, interest, dividends, capital gains etc…) adjustments such as retirement contributions, moving expenses and HSA deposits. Your adjusted gross income is used in several different areas of your itemized deductions to determine how much of a deduction you are entitled to under the law. For instance, you can not begin deducting medical expenses from your income until your expenses exceed 7.5% of your adjusted gross income. If you are self-employed medical insurance premiums you pay a re considered an adjustment to income and not an itemized deduction.

The next item we should mention is your standard deduction. When completing your return before you figure your tax you can reduce your taxable income by the larger of your standard deduction or your itemized deductions. Your standard deduction is a set dollar amount based on your filing status (married, single head of household etc…) For instance this year the standard deductions are:

Married filing Jointly $11,400
Surviving Spouse $11,400
Head of Household $ 8,400
Unmarried $ 5,700
Married filing Separate $ 5,700

Additional amounts are allowed if you are blind or over the age of 65 ($1,100 each instance).

Several years ago the IRS decided they wanted to reduce the number of taxpayers who itemize. They did this by excluding medical expenses up to 7.5% of adjusted gross income as mentioned above, excluding the first $100 plus the next 10% of adjusted gross income for casualty losses such as fire or storm damage and also by excluding the first 2% of adjusted gross income from any miscellaneous deductions such as tax preparation costs, union dues, uniforms and investment management expenses just to name a few. Thus for most taxpayers unless you were buying a home (mortgage interest, taxes) or incurred high charitable giving amounts, taking the standard deduction was the best alternative for you.

For most people you can determine whether it is advantageous to itemize or take the standard deduction by simply adding your property taxes, mortgage interest and charitable contributions together and compare that amount to your standard deduction. Some people come very close to having more itemized deductions than the standard deduction. What we suggest is to get the best of both worlds i.e. use the standard one year and itemize the next. You can do this by delaying the payment of your property taxes to January in alternating years. This will double up your property taxes in the year you itemize and then you take the standard in the other years. You end up getting more deductions across both years than you would have otherwise.

Stay tuned as we detail each category of itemized deductions. We may mention an item that you did not know was deductible. As always if you have any questions please give us a call.