Do you owe the "nanny tax"?

If you had a housekeeper, nanny, gardener, or other household worker help out in 2010, you may have payroll tax obligations (commonly called the "nanny tax"). These payroll taxes apply if you paid a household worker $1,700 or more in 2010, and filing requirements must be met by January 31, 2011. For assistance, call our office.

New tax law will delay processing of 2010 returns

The IRS has announced that it will take until mid to late February before its computers will be able to process certain income tax returns for 2010.

Individual income tax returns that (1) include Schedule A for itemized deductions, (2) claim a deduction for higher education expenses, (3) claim a deduction for educator expenses, or (4) claim a deduction for state and local sales taxes, will not be processed until the computers have been reprogrammed, which is estimated to be completed sometime in February.

This delay affects both paper and electronic filers. The IRS will announce a specific date when it will start processing tax returns impacted by the recent tax law changes. All other tax returns will be processed on the normal schedule as in past years.

IRS eliminates paper coupons for tax deposits

In December 2010, the IRS announced new regulations that effective January 1, 2011, all Federal Tax Deposits must be made using the Electronic Federal Tax Payment System (EFTPS).

The paper coupon system will no longer be available. However, taxpayers who owe minimal amounts may still send their payment along with their tax return. For example, a Form 941 filer that owes less than $2,500 can submit payment with the return or choose to use EFTPS. The minimal amount that permits payment with a return varies with the type of tax. Please contact our office if you need assistance.

2011 tax numbers are adjusted for inflation

Adjusting numbers in the federal income tax code to account for inflation, known as indexing, is an annual event. Indexing affects deductions, exemptions, exclusions, tax brackets - and your tax planning.

Here are selected changes to keep in mind as you review tax strategies for 2011.

* Personal exemptions will increase by $50 to $3,700. You can subtract that amount from your adjusted gross income for yourself, your spouse, and any dependents. In addition, there is no phase-out or reduction in personal exemptions for 2011, no matter how much income you have.

* The basic standard deduction is $11,600 when you're married and file a joint return. If you're single or married filing separately, the standard deduction is $5,800. Additional standard deductions are available for age and/or blindness. Note: The extra standard deduction for real estate taxes is not available for 2011.

* The kiddie tax threshold for 2011 is $1,900. That's how much investment income your child under age 19 (under age 24 for students) can earn before the income is taxed at your highest rate.

* The traditional and Roth IRA contribution limit is $5,000. You can contribute an additional $1,000 if you'll be age 50 or older by the end of the year.

* The annual gift tax exclusion is $13,000 ($26,000 when you elect to split gifts with your spouse).

* Standard mileage rates go up slightly. You can deduct 51¢ for each mile you drive your car for business purposes. The per-mile rate for calculating a charitable deduction is 14¢, and medical and moving mileage is deductible at a rate of 19¢.

Many other items are subject to indexing. In addition, some important figures, such as the alternative minimum tax exemption, are adjusted by Congress. Please contact us for additional information.

New law includes a payroll tax cut

There's a new tax break this year, and you'll want to update your budget to accommodate it. The compromise tax legislation passed in December included a payroll tax cut for 2011.

* How it works when you're an employee: Your employer will deduct less social security tax from your wages during 2011. Prior to the change, your employer was required to withhold social security tax from your paycheck at a rate of 6.2% of the first $106,800 of your wages. That rate was reduced to 4.2% for 2011, meaning your take-home pay will go up - with no impact on your eventual social security benefits and no payback required.

The Medicare tax rate remains unchanged at 1.45%, which your employer will continue to deduct from your check.

* How it works when you're self-employed: You'll pay less self-employment tax. In the past, you calculated self-employment tax using a 12.4% rate for the social security portion. For 2011, the rate you'll use is 10.4%. Your income tax deduction - that is, the amount of self-employment tax you subtract from ordinary income - will not be affected.

* How it works when you're an employer: The reduced rate only applies to the social security tax you deduct from employee wages in 2011. To calculate your expense, you'll continue to use the 6.2% rate for social security tax, plus Medicare tax of 1.45%, for a total of 7.65%.

You have until January 31 to implement the change, and until March 31 to refund any overwithheld social security tax to employees.

You can still make charitable donations from your IRA

The option to make a qualified charitable distribution from your Roth or traditional IRA is once again available for 2010 and 2011. And even though 2010 is officially over, you can take advantage of a special rule that treats a distribution taken in January 2011 as if you made it in 2010.

Here's a refresher on how the IRA charitable distribution works.

* You must be age 70½ or older at the time of the distribution.

* The distribution can come from your traditional and Roth IRAs, but not from SEP or SIMPLE retirement plans.

* The distribution must be made directly from your IRA to an eligible charity. Donor advised funds are not eligible recipients.

* The distribution will count as part of your required minimum distribution. You can elect to have a distribution made in January 2011 applied to your 2010 RMD.

* You can exclude the contribution from your taxable income, though you won't be able to take an itemized deduction for it.

* The maximum amount you can exclude from income as a qualified charitable distribution is $100,000. When you're married filing jointly, the limit applies to each of you separately.

Please call if you're thinking of donating money from your IRA to charity. We'll be happy to help you make sure the transfer stays within the rules.

Mark these tax deadlines on your 2011 calendar

It's time to file various tax returns once again. Among the tax deadlines you may be required to meet in the next few months are the following:
* January 18 - Due date for the fourth quarterly installment of 2010 estimated taxes for individuals unless you file your tax return and pay any taxes due by January 31.
* January 31 - Employers must furnish 2010 W-2 statements to employees. Payers must furnish payees with Form 1099s for various payments made. (The deadline for providing Form 1099B and consolidated statements to customers is February 15.)
* January 31 - Employers must generally file annual federal unemployment (FUTA) tax returns.
* February 28 - Payers must file information returns, such as Form 1099s, with the IRS. This deadline is extended to March 31 for electronic filing.
* February 28 - Employers must send Form W-2 copies to the Social Security Administration. This deadline is extended to March 31 for electronic filing.
* March 1 - Farmers and fishermen who did not make 2010 estimated tax payments must file 2010 tax returns and pay taxes in full.
* April 18 - Individual federal income tax returns for 2010 are due.

New reporting rules may apply to your stock sales

New reporting rules may apply to your stock sales

Effective this year, new reporting rules could make it easier for you to report the tax consequences of selling a stock. Thanks to a 2008 law, responsibility for establishing your "basis" is being shifted to brokers and other financial institutions. But don't discard your records just yet; the new rules are being phased in gradually and don't apply to any securities acquired before 2011.

Form 1099-B (Proceeds from Broker and Barter Exchange Transactions) will be expanded to include the cost or other basis of stock sold during 2011. The form must also report whether the gain or loss on the stock sale is short-term or long-term. The expanded Form 1099-B will be used to report calendar-year 2011 sales and must be filed with the IRS and furnished to investors in early 2012.

The new reporting rules were passed by Congress not only to make it easier for investors to calculate capital gains taxes, but also to make it harder for investors to underreport capital gains.

For details or assistance with the new reporting rules, contact our office.

New 1099 reporting rules may be repealed

The recent health care reform legislation included a new reporting requirement for businesses. Beginning in 2012, a Form 1099 must be filed with the IRS for payments of $600 or more made to corporations. Previous law required such reporting only for amounts of $600 or more paid to unincorporated businesses.

The "Small Business Jobs Act of 2010" added another reporting requirement, this one to take effect January 1, 2011. Landlords will be required to file Forms 1099 with the IRS for payments of $600 or more made for rental property expenses.

Responding to the complaints from businesses that these new reporting requirements would be very burdensome, Senate Finance Committee Chairman Max Baucus has announced legislation that would repeal both of these provisions.

Stay tuned to see if repeal will actually happen. If it doesn't, get your business ready for these new requirements.

IRS has $164.6 million in undeliverable refunds

Are you still waiting for your 2009 tax refund? If so, you may be one of the 111,893 taxpayers to whom the IRS has been unable to deliver a refund check. The refunds total about $164 million.

Every year there are taxpayers who don’t update the IRS or the U.S. Postal Service when they move or change their mailing address. Checks are mailed to the last known address for taxpayers, and when the address isn’t current, the checks are returned as undeliverable.

To check on a missing refund, you can go to the IRS Web site at www.irs.gov and use the "Where’s My Refund?" tool. A reminder: The IRS doesn't contact people by e-mail regarding pending refunds. So if you receive such an e-mail, it's likely to be an identity theft scam. To check on a refund by phone, call 1-800-829-1954.

New law extends Bush-era tax rates for two years

After weeks of wrangling over the details, both the Senate and the House passed a bill that will extend the tax rates in effect in 2010 for another two years, through December 31, 2012. President Obama signed the "2010 Tax Relief Act" into law on December 17, 2010.

Here's an overview of the key provisions in the law.

* Tax rates. The existing tax rates established in the 2001 and 2003 tax laws will continue for all taxpayers through 2012. This means the top tax rate for 2011 and 2012 will remain at 35% instead of reverting to 39.6% as it would have done had the "2010 Tax Relief Act" not passed.

* Capital gains and dividends. The top rate for long-term capital gains will remain at 15% for taxpayers in all but the two lowest ordinary income brackets; those taxpayers will continue to have a 0% rate on capital gains. Dividends will continue to be taxed at the 15% and 0% rates instead of reverting to ordinary income rates as high as 39.6%.

* Itemized deductions and personal exemptions. Higher-income taxpayers will not have their itemized deductions limited and their personal exemptions phased out.

* Education tax breaks. The law extends the American Opportunity Tax Credit through 2012. The income exclusion for up to $5,250 of employer-provided education assistance to employees is continued for two years. The higher contribution limit of $2,000 and other enhancements to Coverdell Education Savings Accounts were extended for two years.

* Alternative minimum tax (AMT). The AMT was given another "patch" for 2010 and 2011, a move that will keep the tax from hitting millions more taxpayers. For 2010, the exemption amount is $47,450 for individuals and $72,450 for married couples filing joint returns. For 2011, the exemption is $48,450 for singles and $74,450 for couples. Without this adjustment, the exemption amounts for 2010 and 2011 would have been $33,750 for singles and $45,000 for couples.

* Payroll tax. A new tax break is created for workers who pay social security taxes. For 2011, the employee rate for social security tax is cut from 6.2% to 4.2% on wages up to $106,800. Self-employed individuals will pay 10.4% on self-employment income up to $106,800. Employers will continue to pay 6.2% on employee wages. This payroll tax rate cut does not affect the Medicare portion of payroll taxes for either employees or employers.

* Extenders. Tax breaks that have come to be called "extenders" because they're typically extended retroactively every year, but just for a year, are again extended by the new law.

Effective for 2010 and 2011 returns, taxpayers have the option of deducting state and local sales taxes instead of state and local income taxes. The deduction for up to $4,000 of higher education expenses and the deduction for teachers who buy classroom supplies are extended. Those age 70½ or older may again contribute up to $100,000 tax-free from an IRA to charity. Note that the deduction for real estate taxes paid by nonitemizers was not extended.

* Business provisions. The law extends the research tax credit for 2010 and 2011, and it extends the work opportunity tax credit through 2011. Bonus depreciation is increased from 50% to 100% for qualified business purchases made from September 9, 2010, through December 31, 2011. 50% bonus depreciation will be available in 2012.

* Estate tax. The estate tax was perhaps the most contentious issue in the law, and it came close to unraveling the deal. The compromise that was agreed upon restores the estate tax retroactive to January 1, 2010, and continues it through December 31, 2012. It establishes a top rate of 35% and an exclusion amount of $5 million ($10 million for married couples). Estates of persons who died in 2010 have the option of applying the estate tax and receiving a step-up in basis on property passing to heirs or having no estate tax but using a carryover of the decedent's basis in property.

The "Tax Relief Act of 2010" also provides an additional 13 months of benefits to the unemployed.

Most of the provisions in the new law will probably go unnoticed by the majority of taxpayers since the law basically keeps things as they were for another two years. However, there are several significant changes that are likely to affect you or your business. For more information and planning guidance as you begin sorting out your tax situation for 2011, contact our office.