Monday, February 28, 2011

States Seek To Manage The Cost Of Tax Credits In The Current Economic Environment

State governments see the need to contain expenditures in order to balance their budgets. While a variety of approaches have been adopted, the states' efforts nevertheless are constrained by political realities. With regard to tax credits and other incentives, data is available from tax filings, specific incentive reporting requirements, economic development agencies, and other sources. The information is compiled and analyzed, with the resulting reports provided to government officials and made available to the public. Based on those reports—or simply due to a state's financial circumstances—states have enacted deferrals or reductions for a variety of tax credits. Changes have occurred also with regard to data collection and expenditure reporting. These trends will continue and accelerate as competition for state funds becomes more intense. Even as the economy rebounds, the reporting and review infrastructure created over the past few years will likely remain, and the scrutiny over tax credits and other tax expenditures will continue. (R. Weiss, 20 Journal of Multistate Taxation and Incentives, No. 10, 6 (February 2011).)

Top Five State And Local Tax Issues To Consider When Buying The Assets Of A Business

Depressed values during an economic downturn may motivate corporate decision-makers to acquire businesses in an effort to improve enterprise capability, market penetration, product mix, and the production process. While business strategies drive the decision to acquire a particular business, the form of the transaction drives a multitude of tax implications. When choosing to acquire the assets of a business, a number of state and local tax issues can significantly affect the overall acquisition cost. This article examines the top five state and local tax issues to consider when acquiring the assets of a business. (I. L. Porwancher, 20 Journal of Multistate Taxation and Incentives, No. 10, 20 (February 2011).)

Why Tax Deductions Aren't Always a Good Thing

By Neal Frankle

During tax season the words, "It's deductible," are often music to our ears. But just because something is tax deductible doesn't mean it's in your best financial interest. A tax deduction is not a rubber stamp of approval on how to spend your money or what debt to incur.

One of my self-employed clients, Tom, recently called me for some advice. Tom had just received $10,000 in windfall profits. He needed to know if he should pay off his credit cards or his car loan with the money. The car loan was costing him 9.7 percent interest. But the car was owned by his small business and, therefore, the payments were deductible. The credit card was charging 2.9 percent interest on his debt, but would go up to 15 percent in January 2012.

I did some quick calculations and figured that the car loan, after the tax deduction, was still costing Tom about 6 percent. Tom is in the 40 percent tax bracket. So, if the total interest on the car loan was $1000, he writes $1000 off of his taxable income, and that saves him $400 in taxes. As a result, the car loan is still costing Tom $600, even after the $400 in tax savings.

I asked Tom if he could pay off the credit card by January if he paid off the car loan now. He said he could. I therefore suggested that he pay off the car loan immediately and then work to pay off the credit card balance before the rate skyrocketed to 15 percent next January. We did the math together and I explained how the car loan was still costing him more than the credit card was-even after the tax benefit.

It's very nice to get a tax deduction. But you need to stay focused on the after-tax cost rather than simply looking at the tax savings. Let's say you have a home mortgage that costs you 4 percent. If you are in the 40 percent tax bracket, your after-tax cost is actually 2.6 percent. This is a very low cost to borrow money and it's a nice tax deduction. But if you earn less than 2.6 percent on your money after-tax, you are better off if you pay that mortgage off. Having the least-cost debt that you can afford or having no debt at all if you can is also the best way to have a good credit score.

Neal Frankle is a certified financial planner and runs Wealth Pilgrim, a personal finance blog that helps people make smart decisions about their money. As a start, he suggests that you strive to understand your credit score range.

Friday, February 25, 2011

Guidance on Tax Consequence of Distressed Homeowner Payments Provided (Notice 2011-14)

The IRS has provided guidance on the federal tax consequences of payments made to or on behalf of financially distressed homeowners under the Treasury Department's Housing Finance Agency (HFA) Innovative Fund for the Hardest-Hit Housing Markets and the Department of Housing and Urban Development's (HUD) Emergency Homeowners' Loan Program. Guidance on the information reporting requirements for these payments is also provided.

Similar to the payments described in Rev. Rul. 2009-19, I.R.B. 2009-29, 112, payments made with approved homeowners' aid program funds promote the general welfare by helping homeowners who are at risk of losing their homes either pay on their mortgage loans or transition to more affordable housing and do not involve the performance of services. Therefore, payments made under these programs to or on behalf of a homeowner are excluded from gross income under the general welfare exclusion.

Because the payments made under these programs are excluded from the homeowners' gross income they are not fixed or determinable income under Code Sec. 6041. Thus, payors are not required to file information returns or furnish copies to homeowners for payments made under these programs.

Further, for purposes of Code Sec. 6050H, interest received from a governmental unit or its agency or instrumentality is not interest received on a mortgage and, thus, is not required to be reported as interest received on a mortgage. Accordingly, if a person receives mortgage interest payments from a governmental unit or its agency or instrumentality, that person should not include those payments in the amount reported as interest received on a mortgage on Form 1098.

Finally, the IRS will not assert Code Sec. 6721 or Code Sec. 6722 penalties under against a mortgage servicer that reports payments received under an approved program on Forms 1098 during 2010. Additionally, the IRS will not assert penalties against mortgage servicers that report on Forms 1098 payments received under an approved program during calendar years 2011 or 2012 if the servicer notifies homeowners that the amounts reported on the Form 1098 are overstated because they include government subsidy payments.

The IRS will not assert Code Sec. 6721 or Code Sec. 6722 penalties against any state housing finance authority (HFA) for failing to file and furnish Forms 1098 for calendar year 2010. For calendar years 2011 and 2012, the IRS will not assert penalties if the state HFA provides each homeowner and the IRS a statement with the homeowner's name and TIN, and separately stating the amount the state HFA and the amount the homeowner paid to the mortgage servicer under the approved program during that year. The IRS intends to issue future published guidance specifying the IRS office where these statements should be filed.

Notice 2011-14, 2011FED ¶46,279

Other References:
Code Sec. 61
CCH Reference - 2011FED ¶5504.026
CCH Reference - 2011FED ¶5504.184
Code Sec. 6041
CCH Reference - 2011FED ¶35,836.075
CCH Reference - 2011FED ¶35,836.30
CCH Reference - 2011FED ¶35,836.61
Code Sec. 6050H
CCH Reference - 2011FED ¶36,186.075
CCH Reference - 2011FED ¶36,186.12
Code Sec. 6721
CCH Reference - 2011FED ¶40,220.75
Code Sec. 6722
CCH Reference - 2011FED ¶40,240.58
Tax Research Consultant
CCH Reference - TRC INDIV: 33,354
CCH Reference - TRC REAL: 6,106.25
CCH Reference - TRC FILEBUS: 9,312

IRS Revoking Exempt Status of "Sizable Number" of Small Organizations, IRS Official Indicates

The IRS Exempt Organizations (EO) Office will be revoking the tax-exemptions of a "sizable number" of small exempt organizations, EO Director Lois Lerner stated at a February 23 meeting of the D.C. Bar Taxation Section. Lerner would not provide any figures but said that the list of revoked organizations should be out in the next month. When it releases the list, EO will also issue Frequently Asked Questions about the effect of the revocation and how organizations can obtain reinstatement of their exempt status, Lerner said.

Lerner noted that EO is currently checking whether the organizations' exempt status being revoked should be revoked. She also noted that some larger organizations required to file Form 990 have attempted to meet their filing requirements by filing the electronic postcard, Form 990-N. EO is therefore checking the eligibility of filers of Form 990-N.

A governance check sheet is being used by EO agents who examine Code Sec. 501(c)(3) organizations, according to Lerner. EO will use the information to study the relationship between governance and tax compliance. Lerner said that EO will release its findings on a rolling basis. She added that EO is coordinating audits of large foundations with the IRS Large Business and International Division.

Ruth Madrigal, an attorney with the Treasury's Office of Tax Policy, said that the charitable deduction for conservation easements may need to better targeted, citing the example of a golf course in a gated community. Provisions for contribution of easements had been extended through 2011 and the Senate has passed legislation to make the deduction permanent, Madrigal noted. The president's fiscal year 2012 budget "Green Book" contains a discussion of a proposal to extend the provisions for one year, she said (TAXDAY, 2011/02/15, T.1).

Madrigal said that the IRS issued a new revenue procedure, Rev. Proc. 2011-10, I.R.B. 2011-2, 294 (TAXDAY, 2011/01/10, I.2), to address the requirements for private foundation rulings. The new revenue procedure is primarily a compilation of existing procedures found in many documents. She indicated that a private foundation needs an IRS ruling if its status changes and it wants IRS recognition.

Guidance that may be issued in the coming months includes regulations on the public support test, appraisal standards, church audits and information-sharing, Madrigal said. The Treasury and EO are also working on guidance under the 2010 health care laws, such as the new requirements under Code Sec. 501(r) for hospital organizations, she indicated. The Treasury is still accepting comments on the new hospital standards. Lerner noted that EO will start looking at hospitals and community benefit issues.

Madrigal also pointed out that the health care laws create a number of new organizations, and it is not always clear whether they are exempt organizations or how the EO provisions might apply to them. Examples include the exchange mechanism (a marketplace for people lacking insurance), an exempt organization for health insurance issuers, Medicare beneficiary organizations composed of hospitals, doctors and other providers, and applicable reinsurance entities (AREs).

By Brant Goldwyn, CCH News Staff

Thursday, February 24, 2011

11 Outrageous Taxes

By Ken and Daria Dolan

If you needed any more proof that our state, local and federal budget spending is out of control, here it is. In an effort to get out from under record deficits and support their spending habits, politicians from Seattle to New York and everywhere in between have cooked up some outrageous taxes.

Some of these taxes are already on the books, some are just up for debate, but all show you just how far politicians will go to put a little more of your money in their pockets.

Sin Tax

Let's start with so-called "sin taxes," which have always been popular with politicians. Taxing items seen as vices--such as smoking, drinking and gambling -- is seen as an easy way to raise tax revenue. But the definition of "sin" seems to be expanding...

Card Tax

Here's proof that some politicians are a few cards short of a full deck. Anyone who purchases a deck of cards in the state of Alabama must pay a "card tax" of 10 cents. However, the law claims that the tax must be levied on the purchase of any deck containing "no more than 54 cards" so if you are lucky enough to find a deck with 55 cards, you're home free! Really, how much money can this possibly raise?!

Nudity Tax

In Utah, any businesses where "nude or partially nude individuals perform any service" have to pay a 10% sales and use tax. This tax is applied to all revenue from admission fees as well as merchandise, food, drink and "services" sales.

Tanning Tax

As part of the controversial Patient Protections and Affordable Care Act of 2010 (better known as healthcare reform), there is now a 10% excise tax on using a tanning salon. This tax is expected to raise a surprising $2.7 billion dollars over 10 years.

Candy Tax

Be careful what you eat in Kentucky or it can cost you. There is now a sales tax on any food classified as candy. But the definition of candy is controverisal -- under Kentucky's definition, a Reese's Peanut Butter Cup is candy, but a Milky Way is not. Huh?

The tax is also snaring some seemingly healthy foods. If a breakfast bar contains natural or artificial sweeteners along with fruits, nuts or other healthy ingredients, but has no flour and doesn't need refrigeration, it's considered candy and is subject to sales tax. But breakfast cereals with exactly the same ingredients are not considered candy and are not taxed.

Crash Tax

After 20 years of living, working and raising a family in New York City, nothing surprises us. But the city certainly has cooked up some outrageous new taxes. We doubt any of these will do much to help them dig out of their massive budget deficit, but let's take a look...

In January, the New York City Fire Department proposed a new "crash tax." The proposal, which stirred up a very heated debate, calls for a $500 fine for anyone in an accident requiring emergency response vehicles at the scene.

Haunted House Tax

Here's a new tax that would scare any reasonable person. If a haunted house includes music and the admission charge is more than 10 cents, then sales tax applies. Yet New York, the home of one of the greatest theater arts communities in the world, doesn't tax musical comedies, operas or chamber music shows. Go figure.

Bagel Tax

New York is cracking down on enforcing the tax on prepared food. One of their targets: the beloved bagel. If you buy a whole bagel and take it home with you, it's tax free. But, if you purchase a bagel to eat at the bagel shop, you'll have to pay sales tax.

A New Kind of Death Tax

As of January 1, 2011 it costs money to die in Seattle. King County, which includes Seattle, has instituted a $50 fee for reporting a death to the Medical Examiner's Office. If you don't pay, you don't get the permission and paperwork needed in order to be buried.

Pharmaceutical Tax

There is now an annual tax on brand name pharmaceutical companies. This is a tax on corporations, not individual taxpayers, that's expected to generate $2.5 billion in 2011. But you better believe the cost of this new tax will be passed on to consumers in the form of higher prices for the brand name drugs we buy.

New FSA Tax

If you use a Flexible Spending Account (FSA) that lets you pay for medical expenses with pre-tax money, brace yourself for new restrictions. New Flexible Spending Account (FSA) rules will limit the amount you can set aside tax-free to just $2,500 starting in 2013. That amounts to a tax increase on anyone who currently uses an FSA to pay for healthcare costs over that $2,500 cap.

With budget deficits reaching a crisis point, we think you'll see plenty of new and outrageous taxes coming your way. We should all pay our fair share, but make sure you're not paying one penny more! Take every tax deduction you're entitled to and make those tax deductions airtight!

Wednesday, February 23, 2011

Don’t be Scammed by Fake IRS Communications

The IRS receives thousands of reports each year from taxpayers who receive suspicious emails, phone calls, faxes or notices claiming to be from the Internal Revenue Service. Many of these scams fraudulently use the Internal Revenue Service name or logo as a lure to make the communication more authentic and enticing. The goal of these scams – known as phishing – is to trick you into revealing personal and financial information. The scammers can then use that information – like your Social Security number, bank account or credit card numbers – to commit identity theft or steal your money.

Here are five things the IRS wants you to know about phishing scams:

1. The IRS doesn’t ask for detailed personal and financial information like PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts.

2. The IRS does not initiate taxpayer communications through e-mail and won’t send a message about your tax account. If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site:

• Do not reply to the message.

• Do not open any attachments. Attachments may contain malicious code that will infect your computer.

• Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, visit the IRS website and enter the search term 'identity theft' for more information and resources to help.

3. The address of the official IRS website is Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site and report it to the IRS.

4. If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS but you suspect they are not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence.

5. You can help shut down these schemes and prevent others from being victimized. Details on how to report specific types of scams and what to do if you’ve been victimized are available at, keyword “phishing.”

Tuesday, February 22, 2011

Get Credit for Your Retirement Savings Contributions

You may be eligible for a tax credit if you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement. Here are six things the IRS wants you to know about the Savers Credit:

1. Income Limits The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and income of:

• Single, married filing separately, or qualifying widow(er), with income up to $27,750

• Head of Household with income up to $41,625

• Married Filing Jointly, with incomes up to $55,500

2. Eligibility requirements To be eligible for the credit you must have been born before January 2, 1992, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.

3. Credit amount If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 or up to $2,000 if filing jointly. The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.

4. Distributions When figuring this credit, you generally must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date - including extensions - for filing the return for the credit year.

5. Other tax benefits The Retirement Savings Contributions Credit is in addition to other tax benefits which may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.

6. Forms to use To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.

For more information, review IRS Publication 590, Individual Retirement Arrangements (IRAs), Publication 4703, Retirement Savings Contributions Credit, and Form 8880. Publications and forms can be downloaded at or ordered by calling 800-TAX-FORM (800-829-3676).

Moving Soon? Let the IRS Know!

If you’ve changed your home or business address, make sure you update that information with the IRS to ensure you receive any refunds or correspondence. The IRS offers five tips for taxpayers that have moved or are about to move:

1. Change Your IRS Address Records You can change your address on file with the IRS in several ways:

• Write the new address in the appropriate boxes on your tax return;

• Use Form 8822, Change of Address, to submit an address or name change any time during the year;

• Give the IRS written notification of your new address by writing to the IRS center where you file your return. Include your full name, old and new addresses, Social Security Number or Employer Identification Number and signature. If you filed a joint return, be sure to include the information for both taxpayers. If you filed a joint return and have since established separate residences, each spouse should notify the IRS of their new address; and

• Should an IRS employee contact you about your account, you may be able to verbally provide a change of address.

2. Notify Your Employer Be sure to also notify your employer of your new address so you get your W-2 forms on time.

3. Notify the Post Office If you change your address after you’ve filed your return, don’t forget to notify the post office at your old address so your mail can be forwarded.

4. Estimated Tax Payments If you make estimated tax payments throughout the year, you should mail a completed Form 8822, Change of Address, or write the IRS campus where you file your return. You may continue to use your old pre-printed payment vouchers until the IRS sends you new ones with your new address. However, do not correct the address on the old voucher.

5. Postal Service The IRS does use the Postal Service’s change of address files to update taxpayer addresses, but it’s still a good idea to notify the IRS directly.

Visit for more information about changing your address. At, you can also find the address of the IRS center where you file your tax return or download Form 8822. The form is also available by calling 800-TAX-FORM (800-829-3676).

How Retired Couples Can Argue Less About Finances


Retired couples face money challenges that working folks don't. You and your spouse might have different views about how much money you need to retire. And people on a fixed budget look at spending and investing differently than those still on the job. Couples who still have a paycheck coming in can usually find a way to pay for extra, unexpected expenses. For retired couples, sudden expenses can be more difficult to cope with. Here are three tips to keep your relationship on track in retirement.

1. Budget. You must have a spending plan if you want financial security. This is even more important when you retire. You can either track your spending by hand or use budget tracking software. Either way, the critical point is to jointly work on your budget together. Think of your budget as the mechanism that expresses your life priorities. As a couple, you will be happier if you discuss, compromise, and work on your priorities together. It's much easier to discuss your financial priorities after you've tracked your spending for awhile so you can see where the money is really going.

2. Give yourself a paycheck. Just because you aren't working doesn't mean you can't have a paycheck. You should think of your retirement income as your pay. Even if you have income that comes in quarterly or annually, do the math and figure out what that income works out to be on a monthly basis. Add up all your monthly income and then compare it to your spending. You and your spouse should agree on the amount of money you're able to spend and no more. If you have a big trip coming up, save up for it out of your paycheck. If you have a large expense, like replacing your refrigerator or buying car insurance, budget for those items too. Please don't think of your retirement investments as available to spend. Try to spend the income from your retirement investments including interest on savings accounts, but not the capital itself.

3. Relax. There will be times when all of your planning and budgeting won't work. There is no need to get upset about situations that are beyond your control. Do your best to figure out how to budget for the next surprise. Recognize that you might need to find a part-time or weekend job to bring in some extra money. It's also a good idea for each person to have a little fun money. This is money that you and your partner can do whatever you want with. There should be no accountability, no tracking, and no arguing. This is a fantastic way to relieve some of the financial pressure on your relationship.

Neal Frankle is a certified financial planner and runs Wealth Pilgrim, a personal finance blog that helps people make smart decisions about their money. As a start, he suggests that you strive to understand your credit score range.

IRS reminds plan sponsors that new submission period began February 1 for individually designed plans and pre-approved defined contribution plans

The IRS reminds plan sponsors that a second submission period opened February 1, 2011 for individually designed plans to obtain a determination letter and for pre-approved defined contribution plans to apply for an opinion or advisory letter.

February 1 is the beginning of the 12-month on-cycle submission period for Cycle A determination letter applications and for opinion and advisory letter applications for most pre-approved plans. The submission period ends January 31, 2012. However, the IRS notes that mass submitters have a nine-month submission period ending on October 31, 2011 under IRS Rev. Proc. 2007-44. The IRS states that it will review all plans submitted during this period using the 2010 Cumulative List.

The IRS notes that the initial set of five-year cycles for individually designed plans and the initial six-year cycle for defined contribution pre-approved plans ended on January 31, 2011.

The IRS advises that it is revising IRS Rev. Proc. 2005-16, which describes the procedures for issuing opinion and advisory letters for pre-approved plans, and the Defined Contribution Listing of Required Modifications. The IRS states that these documents will be released at the same time.

Source: Employee Plans News, Issue Number 2011-2, January 31, 2011.

Will New Rules Nudge Up 401(k) Costs?

David McCann -

The cost of 401(k) plans could be poised for an uptick, thanks to proposed legislation in Congress that would require more disclosure from plan providers and sponsors.

Sponsored by three U.S. senators, the bill would require 401(k) plans to annually disclose an "annuity equivalent." This would show how much monthly income participants would receive upon reaching the plan's normal retirement age if they used their current account balance to buy a life annuity now.

The proposed legislation is in its third incarnation, having gone nowhere in 2007 and 2009. It may stand a better chance to pass now, however, given growing awareness of the need to help secure retirees' finances.

Mark Gutrich, CEO of ePlan Services, which administers 401(k) plans for small companies, says that if the bill becomes law, his costs might rise by at least 5% — and plan sponsors' costs would go up, too. "It would be nice to say we could do that extra work for the same fees, but everyone has a profit margin," he says.

The additional cost would come on top of any cost impact from three new disclosure rules devised by the Department of Labor. One, which took effect last year, requires plan providers to disclose to the government more information on their direct and indirect compensation for administering plans. A second rule, which would be effective on January 1, 2012, mandates the disclosure of similar information to plan sponsors. The third rule, slated to kick in on November 1 of this year, requires plan participants to be informed of fees charged to them within the plan's investment options, and the historical performance and applicable benchmarks for every investment option.

Gutrich says the proposal to include annuity equivalents in benefit statements is particularly vexing. The bill seeks to mimic the annual disclosure of expected retirement benefits from the Social Security Administration, but the attempt makes no sense, Gutrich contends. Social Security, he points out, is a defined-benefit plan where participants have no control over investment of their account balances. Its benefit projections are based on defined, up-front assumptions about annual rate of return, participant salary level, hours worked, and quarters paid.

By contrast, 401(k) projections would involve far more guesswork, says Gutrich. They would require plan providers to make a number of assumptions for the future, about such things as contribution levels, allocation decisions, employer matches, financial-market gyrations, and inflation.

The proposed law would require the DoL, within a year of enactment, to prescribe assumptions that plan administrators could use in calculating annuity equivalents. But Gutrich doubts that all necessary assumptions will be addressed. Overall, he says, the bill is "very typical: politicians talking about complex things in very simplistic terms that resonate with the general public, without any concept of how to actually enact it."

However, the bill does acknowledge that making benefit projections is complicated. It instructs the DoL to issue a model disclosure that is understandable by the average person, explaining that "the actual annuity payments . . . will depend on numerous factors and may vary substantially from the annuity equivalent in the disclosures." It further provides that neither plan providers nor employers can be held liable for the accuracy of the annuity equivalents.

Alan Vorchheimer, a principal at Buck Consultants, says the bill's simplicity will make it less effective as a provider of useful information for plan participants. It's an example, he says, of politicians "pretending they're doing something by putting this out."

Participants are getting so many disclosures now, observes Vorchheimer, that "at a certain point, they're just going to get tossed in the trash. Anyone who works in plan communications knows there is a real limit to how much you can communicate to people now."

Monday, February 21, 2011

Illinois Explains Effects of Income Tax Increases

The Illinois Department of Revenue issued a bulletin that provides information for individuals, trusts, estates, and corporations about: recent income tax rate changes; how estimated payments are affected by the income tax rate change; how fiscal-year filers, short-year filers, and 52/53 week filers will calculate their income tax rate; and changes to Illinois net loss deductions. (Illinois Dept. of Rev. Info. Bulletin FY 2011-09, 02/01/2011.)

Rates increased. For income received on or after January 1, 2011, the income tax rate on individuals, trusts, and estates increased from 3% to 5%. The Illinois income tax rate on corporations (excluding S corporations) increased from 4.8% to 7%.

Estimated payments and the underpayment for estimated tax penalty. If a taxpayer is required to make estimated payments for income received on or after January 1, 2011, the taxpayer will be required to make the payments at the higher tax rate. The worksheets for Forms IL-1040-ES and IL-1120-ES reflect the new rates. Note: If a taxpayer received a preprinted 2011 Form IL-1120-ES from the U.S. Postal Service, the old rate is printed on the worksheets.

For installments of estimated tax due before February 1, 2011, the law requires that taxpayers timely pay the lesser of 100% of the prior year's tax liability or 90% of the current year's tax liability in order to avoid an underpayment of estimated tax late payment penalty. However, for payments due on or after February 1, 2011, and before February 1, 2012, an underpayment of estimated tax late payment penalty can be avoided by timely paying the lesser of 150% of the prior year's tax liability or 90% of the current year's tax liability.

Fiscal-year filers. Fiscal-year filer must divide the total net income between the periods subject to different rates. The amount earned prior to January 1, 2011, is taxed at 3% (individuals, trusts, and estates) and 4.8% (corporations). The amount earned on or after January 1, 2011, is taxed at 5% (individuals, trusts, and estates), and 7% (corporations). The two tax amounts are added together for the total tax liability.

Taxpayers may use the apportionment method or the specific accounting method to figure the total tax due.

Apportionment method (blended rate): The apportionment method is figured by dividing net income earned based on the total number of days in one accounting period in equal ratio to the total number of days in the second accounting period. A convenient way to use this method is to calculate a blended rate and apply it to total income. The Department provided a Blended Income Tax Rate Schedule in the bulletin to assist taxpayers in finding the blended tax rate.

If the taxpayer's tax year is less than 12 months (short-year) or the taxpayer is a business filing on a 52/53 week basis, the taxpayer cannot use the Blended Income Tax Rate Schedule. Instead, taxpayers must figure the blended tax rate using the Apportioned Income Tax Rate Formula that is included in the bulletin.

The Department encourages taxpayers to use the blended rate, if possible. A taxpayer that uses the blended rate does not need to complete Schedule SA (Specific Accounting).

Specific accounting method: The specific accounting method allows taxpayers to treat net income or loss and modifications as though they were earned in two different taxable years (prior to January 1, 2011, and on or after January 1, 2011) and calculates the tax due at the appropriate rate for each period.

Schedule SA: Schedule SA will be made available on the Department website.

Method chosen: Taxpayers must choose which method to use to divide their income on or before the extended due date of their tax return. Once this decision is made, it is irrevocable.

Illinois net loss deductions. If a taxpayer is a corporation (other than an S corporation), the new law suspends the use of the Illinois net loss deduction (NLD) for tax years ending on or after January 1, 2011, and prior to December 31, 2014.

If a taxpayer is a calendar year filer ending on December 31, 2010, the taxpayer may use the Illinois NLD against net income. Fiscal year filers, with tax years ending on or after January 1, 2011, cannot use their Illinois NLD. The carryforward provision will be extended four years for suspended losses.

If a taxpayer is a 52/53 week filer whose tax year ends on or immediately after January 1, 2011, Illinois considers the tax year to end on December 31, 2010, for purposes of the suspension of Illinois NLD. The taxpayer will be eligible to use any available NLD as if all of your income were received as a 2010 calendar year filer. However, the taxpayer must still apply the new tax rate to any income earned after January 1, 2011, that is not offset by NLD.

Illinois replacement tax. The replacement tax rates of 2.5% (corporations) and 1.5% (trusts, S corporations, and partnerships) remain the same.

S corporations and partnerships. S corporations and partnerships are not affected by the tax increase. S corporations and partnerships pay only replacement tax on their income. If the income is distributed to a taxpayer who is responsible for paying income tax, that partner, shareholder, or beneficiary will pay income tax at the higher rate.

If the S corporation or partnership files Form IL-1000 (Pass-through Entity Payment Income Tax Return), on behalf of its nonresident partners and shareholders, the income tax rate increase must be accounted for in the payment amount. Trusts filing Form IL-1000 on behalf of nonresident beneficiaries are also responsible for making pass-through entity payments at the increased rate.

If the S corporation or partnership files Form IL-1023-C (Composite Income and Replacement Tax Return), on behalf of its nonresident partners and shareholders, the income tax rate increase must be accounted for when figuring the tax for the partners and shareholders.

How to Calculate Allowable Disposable Income for a Child Support Withholding Order

Child support withholding takes priority over all other types of garnishments and also above employee voluntary deductions.

The Federal Consumer Credit Protection Act (CCPA) sets limits on the maximum amount that can be withhold from an employees pay for child support (CCPA % limit). Maximum withholding allowed if the employee has a second family is 50% of disposable pay, 55% if more than 12 weeks in arrears. Maximum withholding allowed if the employee does not have a second family is 60% of disposable pay, 65% if more than 12 weeks in arrears.

Do not include imputed income in the calculation of the employee's gross pay for purposes of determining disposable earnings for child support.

This article explains the basic calculation to determine the amount available to withhold each pay period in order to satisfy a child support withholding order.

Difficulty: Moderately Easy


1. Subtract from the employee's gross pay all legally required deductions (i.e. taxes). The remainder is disposable pay.

2. Determine the appropriate CCPA % based on the employee's family and arrears status.

3. Multiply disposable pay by the percentage CCPA % in step 2 to determine the Allowable Disposable Income, which is the maximum amount that can be withheld for child support.

The above steps apply when only when there is one child support order. The full amount goes to this one child support order. When multiple child support orders exist, the first child support order gets priority over the remaining orders. If there is enough disposable income available to pay towards the remaining child support orders, then the second oldest order is considered, etc.

The maximum amount that can be withheld from an employees wages is shown in the second paragraph above. It does not matter how many child support orders exist, the maximum amount that can be withheld is determined as shown in this (the second) paragraph.

Always consult appropriate legal counsel in cases where there are multiple support orders for any employee. This should give you (the employer) the best way to handle multiple support orders for employees, especially if an employee has support orders that are from different states.

Some states allow certain types of deductions in determining disposable income, such as union dues, etc. Other states do not allow these deductions. This is why it is important to check with appropriate legal counsel with regard to multiple support orders.

Some states allow employers to calculate the amount of support to be withheld from an employee's paycheck (based on a set percentage of pay - usually about 20%, but this can vary from state to state). Other states dictate the amount to be withheld, whether or not an employee works a full (40-hour) week. Most states require child support to be withheld from bonuses, commissions (if paid separately), etc. In those states where the employer calculates the support to be withheld (based on a percentage of pay), all overtime must be included in the gross pay for the support calculation, as well as any bonuses, or other payments received by the employee.

It is the employee's responsibility to petition the courts for a redetermination of child support when multiple support orders exist, or when a child turns 18 (or graduates from high school). It is the responsibility of the employee to petition the court to stop the child support order when the child reaches the age of 18 (or graduates high school). The employee must submit a copy of the Child Support Stop order to the employer. The courts (or the state) may also send an order stopping the child support. The employer should verify that the support order has been stopped.

Friday, February 18, 2011

H-1B Visa Cap Reached for FY 2011

U.S. Citizenship and Immigration Services (USCIS) has announced that it has received a sufficient number of H-1B visa petitions to reach the congressionally mandated cap of 65,000 for fiscal year (FY) 2011 (Oct. 1, 2010 to Sept. 30, 2011). The H-1B visa is used by U.S. employers to hire foreign workers in areas of specialized knowledge or technical expertise, such as scientists, engineers, or computer professionals. U.S. employers that apply for the visa must prove that there are no qualified U.S. workers that could fill the position, and must ensure that the H-1B holders are paid the same as their U.S. counterparts.

Petitions that were received by January 26 will be considered for the visa using a random selection process. USCIS will reject H-1B petitions for workers seeking an employment start date in FY 2011 that are received after Jan. 26, 2011. USCIS will refund the filing fee if a petition is rejected.

USCIS has also received more than 20,000 H-1B petitions filed on behalf of persons exempt from the cap under the “advanced degree” exemption. This exemption is available annually to 20,000 foreign workers with a master's or higher level degree from a U.S. academic institution.

Petitions filed on behalf of current H-1B workers who have been counted previously against the cap will not be counted towards the H-1B cap for FY 2011 [USCIS News Release, 1/27/11].

IRS Issues Housing Cost Exclusion Amounts for Individuals Working Abroad in High-Cost Areas

The IRS has issued a notice that allows certain individuals who work outside of the U.S. and live in certain high-cost areas to deduct or exclude a greater portion of their housing costs for the 2011 tax year than is otherwise allowable [Notice 2011-8, 2011-8 IRB].

The U.S. generally taxes its citizens and residents on their worldwide income. However, individuals who have a tax home in a foreign country, and who satisfy either the bona fide foreign residence test or the foreign physical presence test, may elect to exclude certain foreign housing costs paid or incurred on their behalf from gross income (or claim a deduction where the costs are not paid by the employer). This is known as the foreign housing cost exclusion.

The excludable housing cost amount is the excess, if any, of (1) the individual's allowable housing expenses for the year (i.e., the housing expense limitation) over (2) a base amount. For 2011, a taxpayer's allowable housing expenses, assuming he or she is eligible for the entire year, generally can't exceed $27,870. The base amount is $14,864. Therefore, the maximum housing cost exclusion for 2011 is generally $13,006 ($27,870 − $14,864). However, the IRS is permitted to issue regs or other guidance (e.g., Notice 2011-8, 2011-8 IRB) that provide for an adjustment to the maximum allowable housing expense limitation on the basis of geographic differences in housing costs relative to housing costs in the United States.

The notice. The new notice increases the maximum allowable housing expense limitation above the otherwise applicable limitation of $27,870 for localities in: Angola, Argentina, Australia, Austria, the Bahamas, Bahrain, Barbados, Belgium, Bermuda, Bosnia-Herzegovina, Brazil, Canada, Cayman Islands, Chile, China, Colombia, Costa Rica, Denmark, Dominican Republic, Ecuador, France, Germany, Ghana, Greece, Guatemala, Guyana, the Holy See, Hungary, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Kuwait, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Micronesia, Mozambique, Namibia, the Netherlands, Netherlands Antilles, New Zealand, Nicaragua, Norway, Panama, Philippines, Poland, Portugal, Qatar, Russia, Rwanda, Saudi Arabia, Singapore, South Africa, Spain, Suriname, Switzerland, Taiwan, Tanzania, Thailand, Turkey, Ukraine, United Arab Emirates, United Kingdom, Venezuela, and Vietnam.

Illustration: A U.S. taxpayer works in Hong Kong, China, for all of 2011. His maximum housing cost exclusion is $99,436 ($114,300 full year limit on housing expenses in Hong Kong per Notice 2011-8, 2011-8 IRB, minus $14,864 base amount).

Employers Can't Choose Whether to Pay U.S. or Foreign Social Security Taxes

A totalization agreement is designed to eliminate duplicate Social Security taxation on wages earned by individuals who spend part of their working life in two countries. A new IRS Chief Counsel Advice (CCA) notes that employers may not elect to pay either U.S. or foreign Social Security tax if the employment is subject to U.S. FICA tax under a totalization agreement. An employer's failure to pay U.S. Social Security tax and issue W-2 forms when required could have an adverse effect on the employee's Social Security coverage. The CCA says that Congress has expressed concern about the IRS fully enforcing the FICA tax rules on employers with employees working oversees. Chief Counsel believes that to have an IRS policy of FICA tax forgiveness where the employer pays foreign Social Security erroneously, rather than U.S. Social Security taxes, would be difficult to defend and would lack legal justification. Chief Counsel notes that Code Sec. 3121(l) does allow an employer to make a prospective election to pay U.S. FICA taxes in situations where foreign Social Security taxes would otherwise apply [Chief Counsel Advice 201105039].

Employment Tax Returns a Huge Obstacle in Meeting Federal 80% E-Filing Goal

The IRS Oversight Board (the Board) recently issued its annual report on the progress that the IRS is making in reaching its goal of having an overall 80% electronic filing (e-file) participation rate for all major types of tax returns by the 2012 filing year. While significant progress is being made, the Board doesn't believe that the IRS will reach the 80% threshold, and one of the primary reasons that the goal won't be attained is because many employment tax returns are still being filed on paper [IRS Oversight Board, Electronic Filing 2010, Annual Report to Congress].

The report states that only 23% of Forms 941 are currently e-filed, with an even lower e-file rate for all other employment tax returns. To get more of these returns filed electronically, the Board recommends that the IRS develop a direct Form 941 e-file portal, similar to the one the Social Security Administration (SSA) provides for W-2 information. The SSA's W-2 Online application allows employers to e-file their Forms W-2 directly to the SSA. The SSA application also performs various computational checks during the process that small businesses find quite useful. The Board believes that it would not be unreasonable to mandate electronic filing of employment tax returns if a direct e-file portal was made available to employers. Large employers currently have to file W-2 forms electronically and all employers now have to make tax deposits electronically.

In addition, the report notes that, in 2005, the IRS discontinued its Form 941 TeleFile application. At its peak, the application accepted over 850,000 employment tax returns via telephone. The IRS, however, has not replaced the TeleFile application with a similar Internet application, and the Board recommends that the IRS do so.

The Board is also encouraging the IRS to develop a more definitive profile of employers that are submitting the bulk of the paper employment tax returns, and to determine whether better marketing by the IRS and/or industry could help increase their e-file participation.

The entire report is on the Department of Treasury website at

New Rulings Issued on Absences from Work

Recent rulings have been issued on the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA).

Fair Labor Standards Act. In Chavez. v. City of Albuquerque, CA10, Dkt. No. 09-2274, 1/12/11, the U.S. Court of Appeals for the Tenth Circuit ruled that sick leave buy-backs should have been included in the regular rate of pay for overtime computation purposes under the FLSA, but vacation time buy-backs did not have to be included in the regular rate of pay. The employees at issue worked for the City of Albuquerque (the City). They were members of labor unions that entered into collective bargaining agreements (CBAs) with the City. Certain CBAs allowed employees who have accumulated a minimum amount of unused vacation or sick leave to sell that leave back to the City.

29 CFR 778.211(c) of the FLSA includes attendance bonuses in an employee's regular rate of pay. The court considered sick leave buy-backs to be analogous to attendance bonuses. It said that buying back sick days rewards an employee for consistent and as-scheduled attendance. Good attendance provides additional value to the employer.

The court, however, ruled that vacation time buy-backs did not have to be included in an employee's regular rate of pay. The court said that the key difference between sick leave buy-backs and vacation time buy-backs lies in the way each type of day off operates. A sick day is usually unscheduled or unexpected, and is a burden because the employer must find last-minute coverage for the sick employee. In contrast, vacation days are usually scheduled in advance, so their use does not burden the employer in the way that unscheduled absences do. An employee has a duty not to abuse sick days, whereas there is no corresponding duty not to use vacation days.

The court also said that there was nothing inherently wrong with the City's approach of calculating its employees' wage entitlements under the FLSA, and under the applicable CBA, and then paying the greater of the two.

Family and Medical Leave Act. The U.S. Court of Appeals for the First Circuit has affirmed a district court ruling that denied leave under the FMLA to an employee who accompanied her husband on an unapproved seven-week spiritual healing trip [Tayag v. Lahey Clinic Hospital, Inc., CA1, Dkt. No. 10-1169, 1/27/11].

On July 8, 2006, Maria Lucia Tayag requested FMLA leave from August 7 to Sept. 22, 2006, but did not inform her supervisor at Lahey Clinic Hospital (the hospital) that the travel was for a spiritual pilgrimage to the Philippines. Nor did she provide her supervisor with any contact information to reach her during the trip. On July 11, 2006, Tayag's husband underwent an angioplasty procedure. That month, Tayag spoke to Susan Olsen, the hospital's benefits administrator, about the FMLA request, and Olsen requested new FMLA certification from the primary care physician (PCP) for Tayag's husband. The certification from the PCP stated that Maria Tayag should receive medical leave “to accompany Mr. Tayag on any trips as he needs physical assistance on a regular basis.” The PCP provided no explanation as to why a seven-week leave would be needed.

Olsen also requested new FMLA certification from the cardiologist for Tayag's husband. The cardiologist returned the form on Aug. 8, 2006, stating that Tayag's husband was “presently... not incapacitated” and that Tayag would not need leave. Olsen mailed Tayag letters on August 10 and 14 notifying her that the leave was unapproved, and hospital representatives left phone messages with this information at Tayag's home on August 8 and 17. Tayag did not receive any of these messages because she was in the Philippines. Receiving no response, the hospital then sent a letter, dated August 18, that terminated Tayag's employment.

During their time in the Philippines, the Tayags went to Mass, prayed, and spoke with the priest and other pilgrims at the Pilgrimage of Healing Ministry at St. Bartholomew's Parish. Tayag's husband received no conventional medical treatment and met with no doctors or health care providers during his time in the Philippines.

On April 30, 2008, Tayag filed suit against the hospital alleging a number of claims, one being that her termination violated the FMLA. The district court and the First Circuit ruled that Tayag was not entitled to FMLA leave based on the fact that nothing in the PCP's certification provided a basis for a seven-week leave, and the certification by the cardiologist disavowed the need for any leave.

Payroll Service Provider Not Responsible for Overpayments Made to Employee

The U.S. Court of Appeals for the First Circuit has ruled that a payroll service provider was not liable for payments made to a client's payroll manager that were in excess of her salary [Ophthalmic Surgeons Ltd. v. Paychex, Inc., CA1, Dkt. No. 09-2291, 1/31/11].

The facts. Paychex, Inc. (Paychex) provided payroll services to Ophthalmic Surgeons, Ltd. (OSL). OSL claimed that Paychex had breached their contract when, over a period of six years (and with no objections from OSL), it paid Carleen Connor, OSL's payroll manager, $233,159 more than her salary, pursuant to specific instructions from Connor. Connor regularly directed Paychex to deposit more money in her personal account than required by her base pay. During the pay periods when Connor requested more than her base pay, she requested that Paychex split her pay into two direct deposit payments. At some point, a Paychex representative told Connor that issuing her more than one payment for a given pay period was more expensive for OSL. Connor stated that she wanted to split her checks because a single larger check would result in a larger tax withholding. Paychex did not contact anyone at OSL to verify Connor's request.

All reports from Paychex confirming the weekly payroll figures went to Connor for approval, and OSL did not uncover the scheme until a new employee took over as payroll manager.

The contract. The contract between Paychex and OSL stated that “Paychex is authorized to draw from Client's bank account as specified by Client, such amounts as are necessary to pay its employees.” OSL contended that the district court that granted summary judgment to Paycheck erred by finding that the above sentence was clear and unambiguous, and by failing to give meaning to the second operative clause — “such amounts as are necessary to pay its employees.” Specifically, OSL argued that the second operative clause was ambiguous because it can be interpreted as either creating a duty for Paychex to oversee whether the withdrawals are “necessary” to pay OSL's employees, or as allowing Paychex to withdraw from the client's account “blindly” as long as the designated payroll contact person so ordered. Paychex, on the other hand, believed that OSL's interpretation of the contract language would completely negate the specific authorization to withdraw funds “as specified by Client” by requiring Paychex to question whether the requested payroll payments were “necessary” even when the client authorized them. According to Paychex, the simplest reading of the agreement was that Paychex was authorized to withdraw from OSL's account only what OSL specified was necessary to make the payroll payments that OSL requested and no more.

The ruling. The First Circuit granted summary judgment to Paychex. The court found that the contract language at issue clearly and unambiguously established that it was the client who had to specify the amounts that Paychex was authorized to withdraw from the client's bank account. The court interpreted the operative clause — “such amounts as are necessary to pay its employees” — to modify the first operative clause and to create a limitation on the amount of money that Paychex was authorized to withdraw from the client's account. The court didn't interpret this clause as creating an affirmative responsibility for Paychex to verify the amounts that the client specified.

The court also said that it was reasonable for Paychex to rely on Connor's apparent authority to issue additional paychecks in her name. It was undisputed that Connor was authorized to handle payroll and was the designated payroll contact person assigned to communicate with Paychex. Furthermore, the court noted that OSL failed to examine the payroll reports that Paychex sent. That these reports were sent to Connor's attention was not dispositive where OSL, as principal, did not convey any instructions to Paychex that it should do otherwise. The court said that if there was any negligence to be found in this case, it was OSL's own negligence in failing to properly supervise Connor.

Office of Child Support Enforcement Releases Standard Verification of Employment Form

Employers and the Office of Child Support Enforcement (OCSE) have collaborated to create a Standard Verification of Employment (VOE) Response Form. The OCSE says that the form was created to hopefully streamline employer responses to each state's non-standardized request for information to verify a worker's employment. Recognizing that a standard response to a VOE could not include all the information that each state requests, the response form provides the essential information that states need in order to establish and/or modify child support orders.

States will continue to send their state-specific VOEs. Employers may return the Standard VOE Response Form to those states that have agreed to accept it (i.e., Arizona, California, Colorado, Georgia, Hawaii, Iowa, Maine, Massachusetts, Minnesota, Montana, Nevada, Oregon, Pennsylvania, South Dakota, Texas, Vermont, and West Virginia). There may be situations when a state child support enforcement agency will need to contact the employer for additional information not provided on the standard form.

The following states have already announced that they will not accept the standard form: Connecticut, Florida, Idaho, Michigan, Missouri, Nebraska, New York, North Dakota, Tennessee, and Virginia.

The new form has a “Payroll Section” and a “Health Insurance Section.” The Payroll Section asks for information about the employee, employer, and the wages that the employee receives. The Health Insurance Section asks for information about the employee's medical insurance, dental insurance, vision insurance, prescription drug insurance, and mental health insurance.

The new form is on the OCSE website.

Federal Budget Proposal Includes Major Changes to Unemployment Tax Computations

President Obama's budget proposal to Congress includes a recommendation that the federal taxable wage base be increased from $7,000 to $15,000, beginning in 2014. The taxable wage base would be indexed for inflation after 2014. The taxable wage base has been $7,000 since 1983. In addition, the budget proposal would lower federal unemployment tax rates in 2014 so employers' federal unemployment tax liability would not increase. The budget proposal would also suspend interest payments on loans from the federal government to the states for two more years. States were not required to pay interest on federal loans in 2009 and 2010. Thirty-one states have borrowed money from the federal government to help fund their unemployment insurance (UI) programs.

The budget proposal is designed to help states build up their unemployment trusts funds, which have been depleted in recent years due in large part to the poor economy. The President hopes that the federal unemployment tax relief offered to states in the budget will keep them in the short run from having to impose additional taxes on employers, which undermines job creation. In addition, the President believes that the budget proposal would encourage states to put their UI systems on firmer financial footing so they can pay back their debts to the federal government and better respond to future economic conditions [Office of Management and Budget, Budget of the United States Government, Fiscal Year 2012].

Thirty-four states, the District of Columbia, and Puerto Rico currently have taxable wage bases lower than $15,000. They would have to raise their taxable wage bases to at least $15,000 in 2014, if they wanted to receive the maximum federal unemployment tax (FUTA) credits against the FUTA tax.

Several members of Congress have already expressed their concerns about the proposal. House Ways and Means Committee Chairman Dave Camp (R-MI) said that we “need to reform our unemployment programs, but any plan that relies on more than doubling the tax base and then continuing to raise payroll taxes in perpetuity isn't going anywhere in the House. Employers are demanding reforms to the unemployment program, not higher taxes on job creation” [Committee on Ways and Means Press Release, Camp, Davis Respond to Administration's Unemployment Insurance Tax Hike Proposal, 2/8/11].

Ranking member of the Senate Finance Committee Orrin Hatch (R-UT) said that an increase of the taxable wage base from $7,000 to $15,000 would either leave employers with less money to hire, or force workers to accept lower wages [Senator Hatch Press Release, 2/8/11].

The entire budget proposal is on the Office of Management and Budget's website.

IRS Provides Guidance on Nonresident Alien Withholding

The IRS has issued a notice that explains how to compute withholding on wages earned by nonresident alien employees working in the United States [Notice 2011-12, 2011-8 IRB].

Background. The withholding calculations for nonresident alien employees are different than for other employees, because nonresident alien employees are not entitled to the standard deduction that is built into the withholding tables. Notice 2005-76, 2005-2 CB 947, requires employers to add an amount to wages before determining withholding under the wage bracket or percentage methods in order to offset the standard deduction built into the withholding tables. The addback amount varies by pay period (i.e., weekly, biweekly, monthly, etc.).

In 2009 and 2010, there was an additional adjustment that needed to be made because nonresident aliens were not eligible for the Making Work Pay credit in the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5). This adjustment was explained in Notice 2009-91, 2009-48 IRB 717. However, the above adjustment does not have to be made in 2011, because the Making Work Pay credit can no longer be claimed after Dec. 31, 2010.

In the new notice, the IRS states that Notice 2009-91, 2009-48 IRB 717, should not be followed effective with wages paid after Dec. 31, 2010, due to the expiration of the Making Work Pay credit. Withholding calculations should now be calculated using the procedures explained in Notice 2005-76, 2005-2 CB 947.

IRS Explains Why Employee Withholding Amounts Have Changed in 2011

The IRS has recently issued guidance on why employee withholding amounts are different in 2011.

A provision in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) increased employees' take home pay, effective with wages earned beginning Jan. 1, 2011, by reducing the employee Social Security withholding tax rate from 6.2% to 4.2% for one year. However, this new law did not extend the Making Work Pay credit in the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5) beyond Dec. 31, 2010. Certain employees received this credit incrementally through a reduction in the amount withheld from their paychecks. As a result of the above changes, employee take home pay is different in 2011. IRS Special Edition Tax Tip, 2010-11, 2/10/11, notes that for most employees, the net effect of these two changes will result in less total tax being withheld from their paychecks. However, some employees with modest incomes are now having more total tax withheld from their paychecks because the 2% reduction in the Social Security withholding rate only partially offsets the elimination of the Making Work Pay credit [IRS Issue Management Resolution System (IMRS) Issue 10-0001411].

IRS Having Trouble Reading Some Paper W-2s

On the February 3 IRS payroll tax teleconference call, representatives from the IRS Service Center Recognition Image Processing System (SCRIPS) indicated that they are having trouble reading some 2010 paper W-2s that they have received. The 2010 Form W-2 instructions clearly note that the entries on Form W-2 should be typed in black ink using 12-point Courier font. However, some employers are using blue ink or a font smaller than 12-point Courier. The IRS can process these W-2s but they are harder to read, and, therefore, increase the processing time. The deadline for filing paper W-2s with the Social Security Administration is Feb. 28, 2011.

Employers Express Concern about IRS Delay in Processing HIRE Act Payroll Tax Exemption on Amended Returns

On the February 3 IRS payroll tax teleconference call, Debera Salam, Director of Payroll Information and Process Services for Ernst & Young LLP, informed the IRS that several of her clients who recently filed Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, to claim the payroll tax exemption in the Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147) have received letters from the IRS stating that there is a backlog in processing these returns and the returns may not be processed for several months. The payroll tax exemption relieves employers from their share of OASDI taxes (6.2% rate) on wages paid to certain new hires from March 19, 2010 to Dec. 31, 2010. The exemption could not be claimed on Form 941 until the second quarter of 2010. Some employers amended their returns using Form 941-X rather than claiming the exemption on an original Form 941.

The IRS delay in processing the returns is a concern for employers because they have reduced their payroll tax deposits to take into account the credit. It is possible that they will receive an IRS notice proposing a federal tax deposit penalty if the amended return is not taken into account. The IRS said that it will look into this matter.

Salam also noted that the IRS is rejecting Forms 941-X that are filed for the first quarter of 2010 since the payroll tax exemption could not be claimed on Form 941 until the second quarter. (The second quarter return included the payroll tax exemption for the period from March 19 to March 31, 2010.)

Update on State Conformity with Federal Tax Treatment of Health Benefits for Children under Age 27

The Patient Protection and Affordable Care Act (P.L. 111-148), amended Code Sec. 106, effective for the first plan year beginning on or after Sept. 23, 2010, to provide an exclusion from an employee's gross income for contributions that an employer makes to an accident or health plan that provides for health care coverage for the employee's child (as defined in Code Sec. 152(f)(1)) through the end of the taxable year in which the child turns age 26. In addition, the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) amended Code Sec. 105(b), effective March 30, 2010, to extend the general exclusion from gross income for medical care reimbursements under an employer-provided accident or health plan to include reimbursements for an employee's child who has not attained age 27 as of the end of the tax year. Prior to the above legislation, an employee wouldn't have received these benefits unless the child was the employee's dependent.

Some states conform to the current version of the Internal Revenue Code (e.g., Colorado, Connecticut, Delaware, District of Columbia, Idaho, Illinois, Kansas, Louisiana, Maine, Michigan, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Rhode Island, Utah, West Virginia, and Vermont), while others do not. Here is a brief rundown of the latest information we have on whether a state that doesn't conform to the current version of the Internal Revenue Code (IRC) has adopted the federal rules.

• A spokesperson for the Alabama Department of Revenue has communicated that while Alabama conforms to the federal tax treatment of medical care reimbursements under Code Sec. 105(b), it does not recognize Code Sec. 106, which allows employer-provided accident or health insurance benefits to be excluded from an employee's gross income.

• Arizona enacted legislation in 2011 to conform to a version of the IRC that includes the above federal provisions. The conformity is retroactive to the federal effective dates notes above (see L. 2011, H2008 (c. 4)).

• Arkansas has not yet adopted the federal provisions. The Arkansas General Assembly is currently in session for the first time since the federal legislation was enacted.

• California has announced that it does not conform to the federal provision that excludes the value of employer-provided health insurance premium payments for an employee's nondependent adult child under the age of 27 from gross income. As a result, the reporting of the insurance premium wage amount on Form W-2 will be different for California and federal tax purposes (see FTB Tax News Alert, 1/24/11, and EDD Tax Branch News #122, 1/24/11).

• Hawaii conforms to certain IRC sections as of April 1, 2010, but not to the federal health benefits legislation noted above (see L. 2009, H2594).

• Iowa has announced that it is conforming to the federal provision that allows the value of employer-provided health insurance coverage for an employee's child to be excluded from the employee's gross income through the end of the taxable year in which the child turns age 26 (see Iowa Department of Revenue Notice, Health Care Coverage for Nonqualified Dependents, 12/23/10).

• Kentucky has not adopted the above federal provisions. It is advising employers, effective Jan. 1, 2011, to treat the amount of health insurance paid for adult children as being paid with post-tax dollars for Kentucky income tax purposes if the amount paid for those adult children would not be eligible for the gross income exclusion under the IRC in effect on Dec. 31, 2006. There will be differences between federal and Kentucky wages on Form W-2 (see DOR 2010 Employer Health Insurance Notice, 12/27/10).

• A spokesperson for the Comptroller of Maryland has communicated that Maryland has adopted the above federal provisions, effective Jan. 1, 2011.

• A spokesperson for the Massachusetts Department of Revenue has communicated that the value of health insurance coverage for an employee's child under 27 years of age is now generally tax-free to the employee if the coverage was provided under a Code Sec. 125 cafeteria plan.

• Minnesota has not yet adopted the federal legislation. There will be differences between federal and Minnesota wages on Form W-2 (see DOR December 2010 Withholding Tax Announcements, 12/1/10). The 2011 Minnesota legislature may elect to adopt the federal provisions retroactively.

• A spokesperson for the Mississippi Department of Revenue has communicated that Mississippi conforms to the new federal rules.

• Ohio follows the federal rules and extends the exclusion to children who are 28 years old.

• Oregon has not yet adopted the federal legislation. There will be differences between federal and Oregon wages on Form W-2 (see Oregon DOR News Release, 12/2010). The 2011 Oregon legislature may elect to adopt the federal provisions retroactively.

• A spokesperson for the Pennsylvania Department of Revenue has communicated that health benefits and contributions for an adult child under the age of 27 are excluded from Pennsylvania gross income if provided under a Code Sec. 125 cafeteria plan.

• South Carolina conforms to a version of the IRC that was in effect prior to the federal legislation. A spokesperson for the South Carolina Department of Revenue has communicated that until the state legislature addresses the federal legislation, South Carolina employers are required to add back the income that was excluded under the new federal law.

• A spokesperson for the Virginia Department of Taxation has communicated that the state will follow the federal rules until the matter has been addressed by the Virginia General Assembly.

• Wisconsin has not adopted the federal legislation. There will be differences between federal and Wisconsin wages on Form W-2 (see Wisconsin News for Tax Practitioners 08/03/2010, 08/03/2010).

Treasury Working to Build Consensus Prior to Offering Tax Reform Plan

By Heather M. Rothman

The administration is working to build consensus on corporate tax reform with the goal of laying out a plan that would maximize the ability of Congress to actually pass something, Treasury Secretary Timothy Geithner said Feb. 16 at a Senate Finance Committee hearing.

Geithner faced criticism from members of the committee for the exclusion of a comprehensive tax reform plan from President Obama's fiscal year 2012 budget proposal.

“I believe the choice you made in the budget significantly undercuts the opportunity for meaningful tax reform on both the corporate and individual side,” said Sen. Mike Crapo (R-Idaho). “I think the president needs to get engaged and get out and lead on this issue.”

Geithner agreed that strong executive leadership is key and said ultimately a high-ranking administration official would need to lay out a set of proposals.

“I suspect that we're going to get to that point sooner on corporate than on individual, but we'll meet that challenge,” Geithner said. “We're trying to figure out how to build consensus now before we take that next step so that we maximize the chance that we get it done.”

At the White House, Press Secretary Jay Carney said he did not have a timetable for laying out a corporate tax reform proposal, but reiterated Obama's desire to lower the corporate tax rate in a revenue-neutral way.

Corporate Reform Can Move Before Individual

A chief complaint among Senate tax writers was that Obama and the administration have spoken about lowering the corporate tax rate but have not addressed modifying the individual marginal tax rates, which impact the more than 75 percent of small businesses who file as passthrough entities.

Sen. Ron Wyden (D-Ore.), who for many years has offered his own tax reform proposals, urged the administration to move corporate and individual reform simultaneously, citing economists who said doing one without the other could add more distortion to the system because of the interaction between the two sides of the tax code.

Congress, he said, must examine the current structure and see whether “it makes sense for us as a country to allow certain businesses to choose whether they're treated as corporations for tax purposes or not.”

Repatriation, Deferral Discussed

In response to a question from Finance Committee Chairman Max Baucus (D-Mont.), Geithner said the administration would only consider allowing businesses to repatriate overseas profits as part of an overhaul of the corporate side of the Internal Revenue Code.

The administration “will be happy to consider [repatriation] in the context of overall corporate reform,” Geithner said. “If we can do corporate reform right, we'll have a chance to help on that front. But we'll not support it outside the context of comprehensive reform.”

Baucus has dedicated the 112th Congress to thoroughly examining the code, including whether it would be beneficial to move from a worldwide system of taxation to a territorial system. Noting that deferral—the practice where U.S. companies defer paying taxes on income earned by their foreign subsidiaries until the income is imported back to the United States—is currently the biggest tax preference, Baucus said it would grow “on the surface” if the United States moved to a territorial system.

The complete text of this article can be found in the BNA Daily Tax Report, February 17, 2011. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today.

© 2011, The Bureau of National Affairs, Inc.

Topic 602 - Child and Dependent Care Credit

If you paid for the care of a qualifying individual so that you (or your spouse if you are married) could work or look for work, you may be able to claim the credit for child and dependent care expenses. If you are married, both you and your spouse must have earned income, unless one spouse was either a full-time student for 5 months of the tax year or was physically or mentally incapable of self-care. An individual is physically or mentally incapable of self-care if, as a result of a physical or mental defect, the individual is incapable of caring for his or her hygiene or nutritional needs, or requires the full-time attention of another person for the individual's own safety or the safety of others. The expenses you paid must have been for the care of one or more of the following qualifying individuals:

Your dependent who was under age 13 when the care was provided and who was your qualifying child (under the rules for qualifying child)

Your spouse who was physically or mentally incapable of self-care and who had the same principal place of abode as you for more than half of the year

Your dependent who was physically or mentally incapable of self-care and who had the same principal place of abode as you for more than half of the year, or

An individual who was physically or mentally incapable of self-care and had the same principal place of abode as you for more than half of the year, and who would have been your dependent except that the individual had gross income greater than or equal to the exemption amount, the individual filed a joint return, or the individual was the dependent of another taxpayer

For divorced or separated parents or parents who live apart at all times during the last six months of the year, refer to the topic Child of Divorced or Separated Parents or Parents Living Apart in Publication 503, Child and Dependent Care Expenses. Note that a noncustodial parent may not treat a child as a qualifying individual even if the noncustodial parent may claim an exemption for the child.

If a person is a qualifying individual for only a portion of the tax year, then only those expenses incurred when the person is a qualifying individual are included in calculating the credit. For more information on who is a dependent or qualifying child, refer to Publication 501, Exemptions, Standard Deduction, and Filing Information.

In addition to the conditions just described, to take the credit, you must meet all the following conditions:

You must provide the taxpayer identification number (usually the social security number) of the qualifying individual.

You must file a joint return if you are married.

Your payment must be made to a care provider who is not someone you (or your spouse if you are married) can claim as your dependent, or your child who is under age 19, even if he or she is not your dependent. Also, your payment must be made to a provider who is not your spouse or the parent of your child who is your qualifying individual, and

You must report the name, address, and taxpayer identification number, (either the social security number, or the employer identification number) of the care provider on your return. If the care provider is tax exempt, you need only report the name and address on your return. You can use Form W-10 (PDF), Dependent Care Provider's Identification and Certification, to request this information from the care provider. If you do not provide information regarding the care provider, you may still be eligible for the credit if you can show that you exercised due diligence in attempting to provide the required information.

If you qualify for the credit, complete Form 2441 (PDF) with Form 1040 (PDF) or Form 1040A (PDF). If you received dependent care benefits from your employer (this amount should be shown on your Form W-2 (PDF)), you must complete Part III of Form 2441. You cannot use Form 1040EZ if you claim the child and dependent care credit.

The credit is generally a percentage of the amount of work-related child and dependent care expenses you paid to a care provider. The percentage depends on your adjusted gross income. The credit is subject to limits that depend on earned income, the taxable year, and the number of qualifying individuals. These dollar limits must be reduced by the amount of any dependent care benefits provided by your employer that you may exclude from your income. Refer to Publication 503, Child and Dependent Care Expenses, for additional information.

If you pay someone to look after your dependent or spouse in your home, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare taxes and pay federal unemployment tax. For more information, refer to Publication 926, Household Employer's Tax Guide, or to Topic 756

Congress plays chicken over paying for 1099 fix

By Neil deMause

NEW YORK (CNNMoney) -- There's one legislative issue lawmakers on both sides of the aisle overwhelmingly agree on: The onerous 1099 tax-reporting mandate that snuck into the health-care reform bill has to be repealed.

The Republicans promised to eliminate it in their Pledge to America, and President Obama did the same in his State of the Union address. So nearly one year after its passage, why isn't the law dead yet?

Money. Congress can't undo the looming 1099 tax mess without finding $2 billion a year to offset the government revenue the wildly unpopular provision is expected to generate.

Starting in 2012, the new regulations require any taxpayer with business income to issue 1099 forms to all vendors from whom they purchased more than $600 of goods and services in one tax year. That's a massive expansion in the role of the 1099 tax form, which is currently used only to document non-wage income for individual workers. The IRS' National Taxpayer Advocate estimates that this change will affect 40 million taxpayers, creating a compliance burden that could be "disproportionate as compared with any resulting improvement in tax compliance."

Translation: This is a paperwork-intensive tax nightmare. And it might have unintended consequences. Critics of the provision are concerned that it could prompt businesses to consolidate their purchases with a few large vendors in order to cut down on their paperwork, making it harder for small businesses to compete.

The 1099 expansion is universally reviled among both business groups and in Washington: There's rare bipartisan agreement that including it in the health-care bill was a mistake.

But it's a hard one to undo. The expanded 1099 reporting mandate was placed in the health reform bill in late 2009 by the Senate Finance Committee, which was looking for ways to raise revenue to help make health reform "revenue neutral" -- a key demand of Obama's. The bipartisan Congressional Joint Committee on Taxation estimated requiring all purchases of goods and services to be reported on 1099 forms would reduce the "tax gap" on income that businesses collect but don't report could by about $2 billion a year.

Ever since, repeal efforts have foundered on the question of how to replace this federal revenue. The Statutory Pay-As-You-Go Act, better known as in Washington as "paygo," requires nearly all Congressional legislation that cuts taxes or raises expenditures to be accompanied by an equal amounts of new revenue or spending cuts. The goal is to keep the federal deficit from increasing.

So if lawmakers want to eliminate a health-care act provision that the Joint Committee on Taxation says will generate $21.9 billion over the next 10 years, they have to come up with that money in some other way.

Where should they scrounge up the cash? That problem is confounding Congress.

Last year, the Senate repeatedly failed to pass repeal legislation, after senators were unable to agree on how to make up the shortfall in funds.

To break the logjam, the Senate earlier this month resorted to what amounts to a legislative sleight-of-hand. As part of a 1099 repeal amendment that she attached to a Federal Aviation Administration funding bill, Sen. Debbie Stabenow, a Democrat from Michigan, included a clause requiring the Office of Management and Budget to identify $44 billion in "appropriated discretionary funds" -- in other words, money that has been allocated to government programs but not yet spent -- and eliminate them. (A Stabenow spokesman confirms that it would be left entirely up to OMB to figure out where to make the cuts.)

The House, meanwhile, moved ahead with its own bill, introduced by longtime 1099 crusader Rep. Dan Lungren, a California Republican. That bill is due to be marked up by the powerful Ways and Means Committee on Thursday. Less than 48 hours in advance, committee chair Dave Camp -- a Republican from Michigan -- added in a revenue offset provision.

The Camp bill would raise the missing $2 billion a year through an entirely different mechanism than the House version. Its solution: Increase penalties for individuals who, based on their most recent income tax filings, receive tax credits to help pay for health coverage under Obamacare, then turn out to have incomes too high to be eligible.

As Camp's committee wrote in its overview of the legislation: "Because financial circumstances can change significantly in two years (e.g., a new job, a promotion, or a spouse returns to work), subsidies could therefore be provided to many individuals with actual incomes that exceed subsidy eligibility thresholds."

Basically, if you think you qualify for this tax break and then get a new job or bigger paycheck and find out that you don't, you'll have to write a check to the government to pay it back for the money it shelled out on your behalf.

The trouble comes for individuals whose income changes dramatically from year to year. These new health-care subsidies are targeted at low- and middle-income taxpayers.

"Say one wage earner didn't have a job, and their income was 200% of the poverty line, and then midway through the year they get a job and the credit stops," says Judy Solomon ,of the liberal Center on Budget and Policy Priorities. "But at the end of the year, if their income was over 400% of the poverty line, they have to pay everything back."

The Camp bill, says Solomon, would change what had been a stair-step scale for repayment into a series of cliffs. For some households, the results could be dramatic: The Kaiser Commission on Medicaid and the Uninsured estimated recently that for certain families with two working parents earning a combined $90,000, a sudden $5,000 end-of-year bonus for one parent could push the family over the subsidy line and stick it with an unexpected tax bill of $11,200.

So what happens if Camp's 1099 repeal bill passes the House, which seems likely?

It will end up in a conference committee to reconcile the differences with the Senate version -- and it's tough to say how the Democrat-controlled Senate will respond to a bill that pays for a 1099 fix with decreased health-insurance subsidies.

There is some precedent: Congress used a similar maneuver in December to find $19 billion to pay for its "doc fix," the annual band-aid it slaps on legislation that would otherwise lead to a 25% cut in doctors' Medicare reimbursement rates. But the move was controversial, and that fight went right down to the deadline wire.

Which means small business owners -- the ones who will be most affected by the 1099 paperwork blizzard if it takes effect next year, as scheduled -- should brace themselves for a long slog toward repealing this mandate that both Republicans and Democrats want to kill off.

"I don't think we have any sense of where that is heading right now," Solomon says. "It'll probably be a while."

IL Senate bill on minimum wage gets more support

By Alejandra Cancino

A bill that would increase Illinois’ minimum wage by 65 cents this summer is slowly gathering support from Democrat lawmakers from Chicago.

Sen. William Delgado and Sen. Rickey Hendon added their names Tuesday to a growing list of supporters of Senate Bill 1565, which was introduced earlier this month.

The bill would increase the minimum wage by 50 cents, plus the rate of inflation every year, until it is restored to its “historic level” above $10 per hour.

To calculate the historic level, the bill uses 1968 as base year to calculate what today’s minimum wage should be. That year, the minimum wage was $1.60 per hour, enough to support a family of three above the poverty level line, said Madeline Talbott, lead organizer of the community group Action Now, which drafted the bill.

Using that rate, the minimum wage in 2010 dollars would be $10.03 per hour. Talbott said it would take about four years for the minimum wage to reach the historic level. After that, it would just rise with the rate of inflation.

Critics say there is no such thing as a “historic level” because the labor market today is not the way it was more than 40 years ago. Most worrisome, they say that raising the minimum wage would eliminate jobs and keep workers from entering the labor market.

“It makes hiring people with less experience more expensive,” said Michael Saltsman, research fellow at the Employment Policies Institute, a think-tank that focuses on entry-level employment issues.

Unfortunately, Saltsman said, raising the minimum wage has an adversary effect on workers, as employers find ways to automate their business or ask their current workers to take on more work.

The bill would also repeal sections of the Minimum Wage Law that allow employers to pay teenagers and workers who earn tips less than the minimum wage.

That portion of the bill, Saltsman said, would further increase the unemployment rate among teenagers, which is already at a record high of 27.6 percent.

“We know what will happen, they are not going to get hired,” Saltsman said.

Sen. Kimberly Lightford, D-Maywood, who introduced the bill, said companies would always find reasons not to increase the minimum wage, even when they are making large profits.

“It’s important to me that people get paid the proper wage for the work that they do,” Lightford said.

10 Hidden Tax Deductions Exposed

The thousands of pages in the U.S. tax code get more confusing each year, but the big question on most Americans' minds remains very simple: How can I reduce my taxable income? With tax season is in full swing, make tax deductions and tax credits your best friends for the next few months. Many people probably don't realize how many expenses are tax deductible, and don't want to spend hundreds of dollars hiring a CPA to figure it out.

If you're a seasoned tax filer, you don't ever overlook tax deductions like mortgage interest, student loan interest, real estate property taxes, and state taxes. Still, plenty of little-known tax deductions hide deep in the tax code, tricking you into leaving tax refund money on the table.

This list of commonly overlooked personal tax deductions will help beginners and experts alike discover major savings this tax year.

Family, Home, and Major Purchases

1. Dependent parents. More and more often, middle-aged people take care of their aging parents, including paying some or all of their medical expenses. If you're providing more than 50 percent of your parents' financial support, and their expenses exceed 7.5 percent of your adjusted gross income, you may qualify for a big deduction.

2. Mortgage loan discount and origination fees. If you bought a house in 2010, make sure you check your Good Faith Statement and deduct any mortgage origination fees or discount points that you paid. The IRS considers all of these expenses prepaid mortgage interest, and mortgage interest is always deductible for primary residences.

3. Sales tax on a new vehicle. This deduction comes with a lot of restrictions and stipulations--buying a used car doesn't count, for example--but if you purchased a new car in 2010, you may be able to deduct the sales tax on the purchase, even if you don't itemize your deductions. Depending on your filing status (i.e. single, married filing jointly versus married filing separately) and income, your deduction might be a little lower, and if you make more than $135,000, this deduction is not applicable.

4. Home energy efficiency improvements. If you make qualifying energy-efficient home improvements to your primary residence, like installing doors, windows, a water heater, furnace, or air conditioner, you may be able to deduct up to $1,500 off your 2010 tax bill. For more information, see this list of green energy tax credits.

Volunteering and Philanthropy

5. Mileage for volunteer work. If you travel a long way to volunteer for a charity, you can deduct the IRS-determined mileage allowance for your commute back and forth. While the reimbursement rate fell a bit for business expenses this year, fortunately the 14 cents per mile for charity-related travel held steady.

6. Childcare expenses when volunteering. If you paid a babysitter to watch the kids while you volunteered for your church or other non-profit organization, you can deduct that expense on your taxes.

7. Expenses for mentoring programs. Many volunteers for programs such as Big Brothers Big Sisters, Young Life, and youth groups end up spending a lot of their own funds on children by paying for meals and event tickets. You can't deduct the money you spent on yourself, but you can deduct the cash spent on the child.

Work and School

8. Business meals and entertainment. If you're a small-business owner or a self-employed freelancer who takes prospective or current clients out often, you're incurring a great deal of expenses for meals and entertainment. Make sure you keep these expenses separate, because you can deduct 100 percent of the cost of entertainment and 50 percent of what you spend on meals (since you need to eat anyway).

9. Continuing education deductions. If you itemize your deductions, don't miss out on these miscellaneous itemized tax deductions: Subscriptions to professional publications, dues paid to professional associations, investment advisory fees, costs of a safety deposit box, and tax-preparation fees (even if you used online tax preparation software like TurboTax).

10. Jury duty pay. If you received jury duty pay, the IRS considers it like any other taxable income. But if you had to return jury duty compensation because you still had a salary from your employer while at jury duty, then you can deduct the pay from your tax return.

You don't have to be a CPA or a math whiz to figure out that many activities, tasks, and everyday situations can be money-saving tax deductions. But of course fine print can always get in the way, so if you're unsure about itemizing or taking certain deductions, call me at 773-792-1910 or email me at The last thing you want to do is claim a deduction and pay it back later on during an audit.

What deductions have you found on previous tax returns or in getting ready to file this year?

Ten Important Facts About Capital Gains and Losses

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When a capital asset is sold, the difference between the amount you paid for the asset and the amount you sold it for is a capital gain or capital loss.

Here are ten facts from the IRS about gains and losses and how they can affect your Federal income tax return.

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

2. When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.

3. You must report all capital gains.

4. You may deduct capital losses only on investment property, not on property held for personal use.

5. Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.

6. If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.

7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2010, the maximum capital gains rate for most people is 15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.

8. If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

10. Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.

For more information about reporting capital gains and losses, see the Schedule D instructions, Publication 550, Investment Income and Expenses or Publication 17, Your Federal Income Tax. All forms and publications are available at or by calling 800-TAX-FORM (800-829-3676).