Read our Payroll Newsletter summarizing the various changes in payroll withholding and related filing requirements for 2011.

The following is a summary of the various changes in payroll withholding and related filing requirements for 2011.  As always, if you have any questions on these matters please contact us.

 A.            FEDERAL TAX DEPOSITS

Effective January 1, 2011, most taxpayers are required to make federal tax deposits for payroll taxes, corporate income tax, and back-up withholding electronically through use of the electronic federal tax payment system (EFTPS).  Paper coupons are discontinued as the paper coupon system will no longer be maintained by the Treasury Department.  The primary exemption is for employers that have $2,500 or less in quarterly payroll tax liability and that pay this liability when filing the quarterly employment tax return.

Officers and/or employees of a corporation or partnership can become personally liable for failure to withhold and remit federal employment taxes.  If you are using a payroll service to make your deposits, you should ensure that the payments are timely made.  Penalties can equal the amount of the tax due (100% penalty).  If you are having difficulty paying your employment taxes timely, please call us.

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was enacted.  Among other provisions, this legislation extends the 2001 individual and capital gains/dividend tax cuts for a two-year period and, as described further below, decreases the employee portion of social security tax in 2011.  New 2011 withholding tables that reflect the extended income tax rates and payroll tax reduction may be accessed via the Internal Revenue Service website at www.irs.gov.  Employers should implement the 2011 withholding tables as soon as possible but no later than January 31, 2011.

B.            SOCIAL SECURITY/MEDICARE TAXES

For 2011, the taxable social security wage base limit is $106,800.  All wages are taxable for the Medicare portion of the tax.  For 2011, the employee tax rate for social security has been reduced to 4.2%.  The employer tax rate for social security remains unchanged at 6.2%.  In 2011, the Medicare tax rate is 1.45% each for employers and employees, unchanged from 2010.  Employers should implement the 4.2% employee social security tax rate as soon as possible, but not later than January 31, 2011.  The self-employment tax rate is 13.3% on the first $106,800 of net earnings and 2.9% on net earnings in excess of $106,800.

C.            PENNSYLVANIA PERSONAL INCOME TAXES

The withholding rate remains at 3.07%.  Employer Withholding Tax account holders will not receive a paper coupon booklet for 2011.  Instead, employer returns and payments should be filed using three electronic options: Internet, Telefile and third-party software.  If you have not yet registered under one of these methods, we encourage you to do so.  If you want our help in using these filings methods, please call us.  More information can be obtained via the internet at www.revenue.state.pa.us and www.etides.state.pa.us.  Employers may still file using paper returns and checks, however, we recommend that you switch to the DOR mandated methods.

D.            PHILADELPHIA CITY WAGE TAX

The city wage tax changed effective July 1, 2010.  Employers must withhold city wage taxes for residents at the rate of 3.928% (.03928) and nonresidents who work in the city at the rate of 3.4985% (.034985).  Every Pennsylvania employer who employs a Philadelphia resident must register with the Philadelphia City Revenue Commissioner and withhold the city wage tax.

E.            PENNSYLVANIA UNEMPLOYMENT COMPENSATION

 For 2011, the standard rate for unemployment compensation ranges from 2.6770% to 14.5266% on  each employee’s wages up to $8,000.  The state should have notified you of your 2011 rate in the fourth quarter of this year.  The rate for first time employers for 2011 will be 3.703% for non-construction employers and 10.2626% for construction employers. 

 Employers are required to withhold unemployment taxes from employees’ gross wages at a rate of 0.08%.  The amount of compensation subject to employee withholding is not limited.

 F.            NEW HIRE REPORTING

 Federal regulation mandates all employers to report information about any new employee within 20 DAYS of their hire date.  Penalties for noncompliance can be up to $500 per employee.  Mandatory information to report for all Pennsylvania employers includes: employee’s name, address, social security number, date of birth and hire date, also employer’s name, address, federal identification number, contact and phone number.  Multi state employers must report employees electronically.  Additional information and the forms can be obtained at www.panewhires.com or call 1-888-PAHIRES.

 Under the Hiring Incentives to Restore Employment (HIRE) Act, enacted in March of 2010, two new tax benefits are available to employers hiring previously unemployed workers, or those who have been employed for 40 hours or less during the 60-day period ending on the date the employment begins, and who are not related to the employer.  The HIRE Act exempts employers from the employer’s share of social security tax on wages paid to qualified employees from March 19, 2010 through December 31, 2010.  Additionally, for each qualified employee retained for at least 52 consecutive weeks, businesses will be eligible for a general business tax credit (new hire retention credit) up to a maximum of $1,000 on the employer’s 2011 federal tax return.  For additional information, visit the IRS website at www.irs.gov and type “HIRE Act” in the search field.

 G.            RETIREMENT PLANS

 *     The limitation on the exclusion for elective deferrals under 401(k) and other plans remains unchanged at $16,500 for 2011.  Taxpayers who are age 50 and older(during 2011) can make an additional contribution in the amount of $5,500 in 2011.

 *      401(k) and 403(b) plans may offer qualified Roth contributions that allow employees to elect to make all or a portion of their 401(k) contributions on an after-tax basis.  Similar to Roth IRA’s, earnings grow tax free and, in most circumstances, distributions are free from tax when withdrawn.  Your plan documents must be amended to explicitly allow designated Roth contributions. A Roth 401(k) option may be a particularly important fringe benefit to younger employees.

 *     The annual compensation limit taken into account for qualified plan purposes remains unchanged at $245,000 in 2011.

 *     The maximum annual amount of salary reduction contributions to a SIMPLE retirement plan remains unchanged at $11,500 in 2011.  Taxpayers who are age 50 and older (during 2011) can make an additional contribution in the amount of $2,500 in 2011.

 *     The limitation on the annual benefit under a defined benefit plan remains unchanged at $195,000 in 2011.  The limitation for defined contribution plans is $49,000 in 2011.

 *     The amount used to identify highly compensated employees for non-discrimination testing purposes stays at $110,000.

 H.            NON-CASH FRINGE BENEFITS

 The rules regarding the taxation and reporting of fringe benefits still apply.  Taxable fringe benefits include the following:

 *             The cost of nondiscriminatory group-term insurance provided to employees in excess of $50,000.

 *             Personal use of an employer provided vehicle. (Annual lease value table attached)

 *             The cost of life insurance (other than group-term) provided to employees where the employee may determine the beneficiary.

*             Discriminatory payments to key employees under educational assistance plans, self-insured medical reimbursement plans, dependent care assistance programs and group legal service plans.

 I.            1099 REQUIREMENTS

 Form 1099-MISC must be issued to persons and unincorporated entities receiving at least $600  for: 1) services rendered other than as an employee; 2) rent; 3) prizes; 4) medical and health care payments; or 5) other payments.  Form 1099-MISC is not required to be filed for payments to corporations or payments for merchandise.  All payments to law firms or attorneys made in the course of business are required to be reported on a Form 1099-MISC regardless of the dollar amount.

 Form 1099-INT should be filed to report interest payments of at least $10. 

 Penalties for late filing or non-filing, and filing or furnishing incorrect information typically range from $30 to the greater of $250 or 10% of the aggregate amount of the items required to be reported correctly.  In certain instances, these penalties may be higher.   The filing deadline for Forms 1099 and related Form 1096 is February 28, 2011.  The forms should be provided to recipients by January 31, 2011.

 With certain exceptions, effective for payments made in 2011, property owners who receive rental income will be required to issue a Form 1099-MISC to report payments of $600 or more made during the year for any expenses related to their rental properties.  This will include payments made to service providers, such as painters, plumbers and accountants, in the course of earning rental income.

 Beginning with payments made in 2012, under a provision of the health care reform legislation enacted in March, 2010, businesses will be required to report a wider range of payments on Form 1099.  The new provision will require expanded information reporting on payments in excess of $600 made from businesses to corporations and to other vendors for goods.  While legislation has been introduced to Congress to repeal this business reporting provision, it currently remains in effect, and will commence with information returns filed in January of 2013. 

 Given these expanded reporting requirements, we recommend that you collect names, addresses and taxpayer identification numbers for every payee and vendor with whom you transact business.  Forms W-9 should be used for this purpose and may be obtained via the internet at www.irs.gov.  If you have any questions regarding these requirements, please contact us.

 We have attached an announcement from Pennsylvania Department of Labor and Industry regarding the differences between an “Employee or Independent Contractor”.  This distinction is important for federal income taxes also.  Improper reporting of workers can result in a requirement to pay back taxes plus interest and punitive penalties.  If you need help determining whether a worker is an employee or independent contractor, call us.

 J.         EMPLOYEE BUSINESS EXPENSE REIMBURSEMENTS

 If an employee is reimbursed for business expenses under an “accountable plan”, the reimbursements are not treated as taxable income to the employee.  An accountable plan must require the employer to: 1) substantiate the nature and amount of the expenses, and 2) repay to the employer any reimbursements in excess of the business expenses incurred.  Please contact us if you need assistance in designing an accountable plan.

 K.            STANDARD MILEAGE RATES

 The standard mileage rate for business automobile usage is 51 cents per mile in 2011 (increased from 50 cents in 2010).  The optional mileage allowance deduction may be used for leased as well as purchased autos.  If you elect the standard mileage rate for a  leased auto,  that method must be used for the entire lease period (including renewals) of the auto. 

 L.            ANNUAL LEASE VALUE AMOUNTS FOR PERSONAL USE OF COMPANY CARS

 Attached is a table showing the annual value to employees for the personal use of a company car.  This “Annual Lease Value” (ALV) of the auto is includible in the employee’s income, unless the car is used exclusively for business purposes.  If the car is used partly for personal driving, a percentage of the ALV (based on the percentage of personal use) is reported on the employee’s W-2.  Note that the ALV does not change each year.  Instead, it is treated as constant for each of the first four years of use.  If the company car is still in use after four years, it is revalued at the beginning of the fifth year, and the ALV based on this new fair market value is used for the next four years of employee use.  The ALV includes the value of auto insurance, registration fees and repairs paid by the company.  It does not include the cost of fuel.  If the company pays for fuel, the cost consumed in personal driving is additional W-2 income to the employee.  A standard rate of 5½ cents per mile may be used in computing income attributable to personal fuel costs  paid by the employer.

 M.           MINIMUM WAGE RATE

The minimum wage rate remains at $7.25 per hour in 2011.

 N.            LOCAL PAYROLL TAXES

 The Local Services Tax (LST) allows local governments to levy a tax of $10 to $52 per employee per year.  If the locality levies a tax of $10, then the employer should withhold the tax from the first paycheck of the employee unless the employee qualifies for an exemption.  The LST exempts employees who make less then $12,000 annually from the tax.  Such employees should file an exemption certificate with the employer to prevent withholding.  The employer must obtain and retain exemption certificates to document the non-withholding exemption.  The LST also exempts disabled veterans and reservists who are called to active duty at anytime during the year from the tax.

 The LST (if more than $10) is not collected at one time, but must be withheld pro rata during the year with each payroll.  For example, if wages are paid every 2 weeks then the employer must withhold $2 per payroll.

  

DISCLOSURE

 The above synopses are brief reviews of general payroll tax issues.  They are not intended to be complete explanations or to provide tax advice for specific fact patterns.  Please discuss any decision concerning specific situations with a tax advisor qualified on such issues.

 

 

 

 IMPORTANT NOTICE

 EMPLOYEE OR INDEPENDENT CONTRACTOR?

 It is important that all employers doing business within the Commonwealth of Pennsylvania understand that, under the Pennsylvania Unemployment Compensation Law (LAW), for both benefit and tax purposes, the term, “employee” applies to every individual who is performing or has performed services for which the individual is receiving or has received remuneration from an employer, if those services are subject to coverage under the Law.  Unless specifically excluded from coverage, all work for which wages are paid under any contract of hire, express or implied, written or oral, is “employment.”

 Services performed by a worker will be exempt under the benefit and taxing provisions of the law if the individual is, in fact, an “independent contractor.”  In order to be excluded from coverage, the person who performs the services must meet two conditions:

 (1)     the individual must be free from control or direction over the performance of the services involved, and

 (2)     the individual is customarily engaged in an independently established trade, occupation, profession or business.

 Only if both of these conditions are met to the satisfaction of the Department will the relationship be deemed to be that of an “independent contractor.”  Unless and until those criteria are met, the services will be “employment” subject to the coverage of the Law.

 The mere designation of an employer of independent contractor status, even if agreed to by the individual performing such services, is not compelling.  Similarly, the issuance of a Federal Form 1099 is not conclusive.  A written agreement does not preclude an examination of the facts to determine whether the performance of the services is subject to control or direction.  If the examination demonstrates either the exercise of or the right to exercise such control or direction, then the worker would be considered an employee and not an independent contractor.  It is immaterial if the services are performed on a full-time, part-time or casual basis.

 The Bureau of Employer Tax Operations routinely audits employers to verify the status of employees and contractors.  If audited, an employer should have sufficient documentation to substantiate the reasons for classifying an individual as an “independent contractor”; the Department will make a status determination.  Failure to provide adequate justification could result in a determination that the earnings are covered wages under the Law.  Examples of relevant documentation would include copies of the individual’s pre-printed invoices, business forms and stationery, Federal and State tax ID numbers, business telephone directory listings, public advertisements soliciting business, Articles of Incorporation and leases on business properties.

 If you have any questions regarding the above call us to discuss your situation in greater detail.

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.