Income Tax Preparation & Small Business Accounting

What's New this Year

PERSONAL TAX CREDITS

  • The Making Work Pay Credit expired as did the Home Buyer Credit except for certain military personnel.
  • The adoption credit and exclusion have new substantiation requirements.
  • Various credits were extended along with their liberalized phase-out limits. The TRUJCA of 2010 extended the ability to offset regular and AMT tax for 2010 and 2011 by certain personal credits.

EDUCATION TAX CREDIT:

  • The American Opportunity Tax Credit (AOTC) and the Higher Education Expense Deduction have been extended through 2012.
  • 529 Plan qualified distributions include deductions for technology and equipment.
  • Coverdell Education Savings Account maximum contributions of $2,000 have been extended through 2012, with the limit dropping to $500 in 2012.


FILING STATUS:

  • Different filing statuses for federal and state tax returns for same-sex couples in some states. (THIS INCLUDES OUR STATE OF ILLINOIS).
  • If tax savings exist, in Illinois starting the 2011 tax year same-sex couples might want to file joint income tax returns.  Beware there are complex was of calculation the AGI to be used.  Consult a professional.
  • The IRS continues to increase its compliance efforts in identifying and adjusting returns that include dependents claimed on multiple returns.

HSA ACCOUNTS:

  • The penalty for distributions not used for qualified medical expenses is 20% in 2011 for HSAs.
  • The definition of qualified medical expenses is the same as the definition for deducting medical expenses on Schedule A as an itemized deduction. This makes over-the-counter drugs ineligible, unless doctor prescribed (Rev. Rul. 2010-23).

DIVORCE:

  • The IRS tightens up exceptions to using Form 8332 to claim an exemption for a child for court orders or divorce decrees, and the tax courts are finding for the IRS!  GET A FORM 8332 SIGNED!
  • Commissioner Shulman announced the IRS is eliminating the two-year window for equitable innocent spouse relief  see under IRC Sec. 6015(f).
  • Recent Private Letter Rulings address the transfers of restricted stock and property received in ESOP plan’s creation.

AMT:
The Tax Relief Act and Job Creation Tax Act of 2010 (signed Dec. 17, 2010) increased the AMT exemption for 2010 and 2011. The act also allows certain non-refundable personal credits to reduce AMT. 2012 may revert back to statutory law we will know more later.

FOREIGN EARNED INCOME:
Increase in the Foreign Earned Income Exclusion amounts.

CAPITAL GAINS AND LOSSES:

  • The TRUJCA of December 2010 extended the lower rates for 2011 and 2012.
  • There are New 1099 tracking rules for brokers.

CAPITAL GAINS CHANGES:

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) is set to expire on 12/31/12. Under current rules, most long-term capital gains and qualifying dividend income are taxed at a maximum rate of 15%. Unless there is legislative action in 2012 for 2013 the long-term capital gains will be taxed at 20% in 2013 and qualifying dividend income will be taxed at ordinary income rates.

Currently a zero tax rate applies to most long-term capital gain and qualifying dividends, if the taxpayer is in a 15% or lower tax bracket (including the capital gains and qualifying dividends as income). The zero tax rate does not apply to collectibles which are taxed at a maximum rate of 28%. Any IRC Sec. 1202 gain (gain taxed on
sales of certain small business stock), or un-recaptured IRC Sec. 1250 gain, is  taxed at a maximum rate of 25%.

Important Tax Note!!!

FUTURE NEW TAXES:
 The combination of the EGTTRA sunset and the new “health care reform” taxes in the same year could create a 27% tax increase in 2013 on certain taxpayers.

Health care reform added two new taxes.

  1. One is Medicare contribution tax on investment income. For tax years beginning after December 31, 2012,a 3.8% tax will apply to net investment income of higher income taxpayers. The tax for individuals is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount (IRC Sec. 1411(a)(1)). The threshold amount is $250,000 for a married filing joint return or surviving spouse, $125,000 for a married filing separate return, and $200,000 in any other case (IRC Sec. 1411(b)). Net gains attributed to the disposition of nontrade or business property are included in the definition of net investment income; therefore, gains on the sale of securities will be subjected to the tax.
  2. A hospital insurance tax kicks in at the same time for earned income that raises the Medicare tax rate from 1.45% to 2.35%, a .9% increase. Those subject to the tax are defined under the same thresholds as the previous section 1.

INSTALLMENT SALES:
An expected increase in ordinary and capital gains tax rates in 2013 will affect future taxes on installment sale payments.

HOUSEHOLD EMPLOYEES FILED
(FILED WITH TAXPAYERS FORM 1040)

  1. The social security and Medicare wage threshold will remain at $1,700 for 2011.
  2. For 2011, the employee tax rate for social security is 4.2%. The employer tax rate
  3. The Medicare tax rate is 1.45% each for employers and employees, unchanged from 2010.
  4. For 2010, Indiana, Michigan, and South Carolina were “credit reduction states”, which means that employers in these three states will pay extra taxes in 2011 (2010 taxes are payable in 2011). Employers who pay wages that are subject to the unemployment tax laws of a credit reduction state must pay additional federal unemployment tax. The FUTA tax rate was 6.2% through June 30, 2011. The tax rate decreased to 6.0% as of July 1, 2011.


HEALTH CARE REFORM ACT:
The combination of the EGTTRA sunset and the new “health care reform” taxes in the same year could create a 27% tax increase in 2013 on certain taxpayers.

FUTURE NEW TAXES: Health care reform added two new taxes.

WHAT’S NEW

  • The free choice vouchers scheduled to be implemented in 2014 under the Patient Protection Act were repealed (Department of Defense and Full-Year Continuing Appropriations Act signed by the President April 15, 2011).
  • Notice 2010-82 clarified spouses are not considered employees taken into account for purposes of the health insurance credit.
  • Notice 2010-82 provides additional guidance on transition rules through 2013 on meeting the uniform percentage requirement

EFFECTIVE IN 2010

  1. No lifetime limits on coverage.
  2. Coverage for children under 27 years old via their parents insurance plans.
  3. No discrimination against children with pre-existing conditions
  4. Small business tax credit for providing health insurance (see below); and
  5. Creation of a temporary high-risk pool for individuals who are uninsured due to a pre-existing condition.

 







ABP Tax Services is proud to provide affordable, quality tax preparation to McHenry County and the surrounding areas, including Wonder Lake,
Woodstock, McHenry, Crystal Lake, Harvard, Lake in the Hills, Elgin, Huntley, Rockford, Cary, Fox River Grove, Hebron, Algonquin, Lakewood, Alden,
Marengo, Spring Grove, Johnsburg, Chicago and more. We also provide remote tax preparation for out of state clients all over the US including
Missouri, Indiana, Florida, Virginia, Washington, California, Ohio and others. We can prepare and file local income tax forms for all 50 US states.