November 2011 TAX ALERTS

Transcription

1 November 2011 TAX ALERTS Social Security Wage Base Increases to $110,100 for 2012 The Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) in 2012 increases to $110,100 from $106,800, which was the wage base for 2009 through The $3,300 increase, which is about 3%, is due to an increase in average total wages. The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax). The FICA tax rate for employees and employers normally is 7.65% each 6.2% for OASDI and 1.45% for HI. However, for 2011, the OASDI rate for employees is 4.2%. For self-employed workers, the FICA tax normally is 15.3% 12.4% for OASDI and 2.9% for HI. However, for 2011, the self-employment tax rate is 13.3%: 10.4% for OASDI, reflecting the two percentage point drop in the OASDI rate for employees, plus 2.9% for HI. There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI. Therefore, for a salary of $110,100 or more, an employee and his employer each will pay $6,826.20, the maximum amount for Social Security tax in For 2011, an employer pays $6, on a salary of $106,800 (or more) but an employee pays only $4, A self-employed person with at least $110,100 in net self-employment earnings will pay $13, for the Social Security part of the self-employment tax in For 2011, a self-employed person with at least $106,800 of net self-employment earnings pays only $11, for the Social Security part of the self-employment tax. Self-employed workers can deduct half of their selfemployment tax before arriving at the adjusted gross income. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) , (949) , (310) , or (213)

2 Most Retirement Plan Dollar Limits are Changed for 2012 Internal Revenue Service (IRS) has announced the 2012 cost-of-living adjustments (COLAs) for retirement plans. Most of the limits related to pension and other retirement plans, which are adjusted per Internal Revenue Code (IRC) Section 415(d), are changed for 2012, since the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. The following plan limits are increased effective January 1, 2012: Defined benefit plans. The limitation on the annual benefit under a defined benefit plan under IRC Section 415(b)(1)(A) is increased from $195,000 to $200,000. For participants who separated from service before January 1, 2010, the 100% of average high-threeyears' compensation under IRC Section 415(b)(1)(B) for 2012 is computed by multiplying the participant's 2011 compensation limitation by in order to reflect changes in the cost-of-living index from the quarter ended September 30, 2008 to the quarter ended September 30, For participants who separated from service during 2010 or 2011, the participant's 2011 compensation limitation is multiplied by in order to reflect changes in the cost-of-living index from the quarter ended September 30, 2010, to the quarter ended September 30, Defined contribution plans. The limit on the annual additions to a participant's defined contribution account under IRC Section 415(c)(1)(A) is increased from $49,000 to $50,000. Annual compensation limit. The maximum amount of annual compensation that can be taken into account for various qualified plan purposes, including IRC Sections 401(a) (17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii), is increased from $245,000 to $250,000. Elective deferrals. The IRC Section 402(g)(1) limit on the exclusion for elective deferrals is increased from $16,500 to $17,000. Deferred compensation plans. The limit on deferrals under IRC Section 457(e)(15), concerning deferred compensation plans of state and local governments and taxexempt organizations, is increased from $16,500 to $17,000. Key employee in top-heavy plan. The dollar limit under IRC Section 416(i)(1)(A)(i), relating to the definition of key employee in a top-heavy plan is increased from $160,000 to $165,000. ESOP five-year distribution period. The dollar amount under IRC Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan (ESOP) subject to a five-year distribution period is increased from $985,000 to $1,015,000, while the dollar amount used to determine the lengthening of the five-year distribution period is increased from $195,000 to $200,000. Highly compensated employee. The dollar limit used in defining a highly compensated employee under IRC Section 414(q)(1)(B) is increased from $110,000 to $115,000. 2

3 Most Retirement Plan Dollar Limits are Changed for 2012 (continued) Government plans. The annual compensation limitation under IRC Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993 allowed COLAs to the plan's compensation limit under IRC Section 401(a) (17) to be taken into account, is increased from $360,000 to $375,000. Control employee. The employee compensation amounts used in the definition of control employee for purposes of the auto commuting rule of Treasury Regulation ("Reg.") Section (f)(5)(i) is increased from $95,000 to $100,000; and the compensation amount under Reg. Section (f)(5)(iii) is increased from $195,000 to $205,000. The following plan limits are unchanged: Catch-up contributions. The dollar limit under IRC Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in IRC Section 401(k)(11) or 408(p) for individuals aged 50 or over is $5,500. The dollar limit under IRC Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in IRC Section 401(k)(11) or 408(p) for individuals aged 50 or over remains at $2,500. SEPs. The compensation limit under IRC Section 408(k)(2)(C) (amount of compensation above which an employee who meets other requirements must be able to participate in the employer's SEP plan) remains at $550. SIMPLE accounts. The maximum amount of compensation an employee may elect to defer under IRC Section 408(p)(2)(E) for a SIMPLE plan remains at $11,500. The following plan limits calculated by reference to IRC Section 1(f)(3) are increased: Excess employee compensation for purposes of determining installment acceleration amounts. The IRC Section 430(c)(7)(D)(i)(II) limit used to determine excess employee compensation for single-employer defined benefit plans for which the special election under IRC Section 430(c)(2)(D) has been made is increased from $1,014,000 to $1,039,000. Saver's credit AGI amounts. For tax years beginning in 2012, an eligible lower-income taxpayer can claim a nonrefundable tax credit for the applicable percentage (50%, 20%, or 10%, depending on filing status and AGI) of up to $2,000 of his qualified retirement savings contributions, as follows: Joint filers: $0 to $34,500, 50%; $34,500 to $37,500, 20%; and $37,500 to $57,500, 10% (no credit if AGI is above $57,500). Heads of households: $0 to $25,875, 50%; $25,875 to $28,125, 20%; and $28,125 to $43,125, 10% (no credit if AGI is above $43,125). All other filers: $0 to $17,125, 50%; $17,125 to $18,750, 20%; and $18,750 to $28,750, 10% (no credit if AGI is above $28,750). For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) , (949) , (310) , or (213)

4 New Form 8949 Replaces Form 1040, Schedule D-1 Newly released draft instructions to the 2011 Form 1040 Schedule D reveal that the IRS has created new Form 8949, Sales and Other Dispositions of Capital Assets (currently still in draft form), to replace Schedule D-1. This and other changes affecting the 2011 Form 1040, Schedule D, are explained below. New Form 8949 The draft Schedule D instructions direct taxpayers to complete Form 8949 before completing Schedule D. Form 8949 does not have its own instructions. Rather, instructions for completing Form 8949 are included in the instructions to Schedule D. Specifically, the taxpayer uses Form 8949 to report: The sale or exchange of a capital asset not reported on another form or schedule, Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit, and Nonbusiness bad debts. The taxpayer uses Schedule D: To figure the overall gain or loss from transactions reported on Form 8949, and To report capital gain distributions not reported directly on Form 1040, line 13 (or effectively connected capital gain distributions not reported directly on Form 1040NR, line 14.) Basis on Form 1099-B The draft Schedule D instructions point out that a taxpayer who sold a covered security in 2011 should be sent a Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, from his broker that shows his basis. This will help in completing Form Generally, a covered security is a security acquired by the taxpayer after 2010, with certain exceptions explained in the instructions for Form 1099-B. Adjustments to gain or loss on Form 8949 The draft Schedule D instructions note that, in certain situations, a taxpayer will have to put a code in column (b) of Form 8949 and make an adjustment to his gain or loss in column (g), as detailed in the instructions for Form Short sales Some instructions for reporting short sales have changed. 4

5 New Form 8949 Replaces Form 1040, Schedule D-1 (continued) 5

6 New Form 8949 Replaces Form 1040, Schedule D-1 (continued) For more information about this article, please contact us at or any of our tax professionals at (562) , (949) , (310) , or (213)

7 New Requirement for Property Tax Deduction This article is reproduced with permission from Spidell Publishing, Inc. Originally, the California Franchise Tax Board (FTB) was planning to add a section to Schedule CA of Form 540 asking taxpayers who deduct property tax as an itemized deduction to list both the address and parcel number of the property. The form is currently only a draft, so this decision is not final. As of October 31, 2011, they have decided to exclude the parcel number request. The draft version of Schedule CA requesting the additional property tax information can be found at: drafts/11_540cadraft.pdf. The form instructions will provide a brief discussion of what is and is not deductible, but the taxpayer should take a close look at each property tax bill to determine whether the listed items are deductible. Multiple properties The draft form includes space to list two properties. The instructions for the draft form do not address how to handle more than two properties. However, the FTB has verbally stated that if the taxpayer has more than two properties, he or she must list the first two and add the total and deductible amounts from the other properties off the form. Rental property On the draft form, the FTB is requesting information only for residences and other property used for personal or investment. Taxpayers who deduct property tax on Schedules C, E, and F will not be asked for this information. Deductible property taxes California conforms to federal law regarding a taxpayer's real estate tax deduction. Taxpayers may deduct the tax if it is based on the assessed value of the real property and the taxing authority charges a uniform rate on all property in its jurisdiction. The tax must be for the welfare of the general public and not a payment for a special privilege granted or service rendered to the property owner. Taxpayers may not deduct the amounts they pay for local benefits that tend to increase the value of their property (such as the construction of streets, sidewalks, or water and sewer systems). In other words, Mello-Roos taxes are not deductible and there may be other items on the bill that are not deductible. However, amounts paid for maintenance, repair, or interest charges related to those benefits are deductible. If only a part of the assessed amount is for maintenance, repair, or interest charges, the taxpayer must be able to show the amount of that part to claim the deduction. 7

8 New Requirement for Property Tax Deduction (continued) Charges for services provided to the property are also not deductible. Taxpayers may not deduct any of the following charges as a real estate tax: A unit fee for the delivery of a service, such as water; A periodic charge for a residential service, such as trash collection; or A flat fee charged for a single service provided by the local government, such as mowing the property's lawn. The FTB has been asked to provide an education campaign to alert taxpayers of the correct computation of the deduction. There may be potential problems with the program that attempts to match property tax deducted with what is allowable. For example, many counties do not provide adequate information to determine whether an assessment is deductible. Also some properties have multiple parcel numbers. Finally, taxpayers with out-of-state property may have difficulty determining the deductible amount. EXAMPLE: Hope's total property tax bill is $5,973. The breakdown of that bill is as follows: Basic levy $ 4,756 Mello-Roos $ 1,214 Vector control $ 3 Only the $4,756 basic levy is deductible. The Mello-Roos and the vector control service are not deductible amounts. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) , (949) , (310) , or (213)

9 Important Changes to California Key Forms for 2011 This article is reproduced with permission from Spidell Publishing, Inc. The California Franchise Tax Board (FTB) will make a number of form changes this year that will require taxpayers to provide additional information on their 2011 California individual income tax returns. Date of birth on the Form 540 The FTB will continue to require the taxpayer to include his or her date of birth on Form 540, California Resident Income Tax Return. They have advised software publishers to include the date of birth only on the copy that the taxpayer is e-filing or paper filing and to redact it from the retained paper copy of the return. According to the FTB, some software companies have already programmed this feature, but others have not. Taxpayers should confirm that the software company they or their accountants used redacts this information from the retained paper copy to prevent identity theft. Child and Dependent Care Credit The FTB will no longer require the qualifying child's social security number on Form 540. There will be no changes to Form 3506, Child and Dependent Care Expenses Credit; the child's Social Security number is still required. As the credit is no longer refundable, it is expected that few taxpayers will claim the credit. Motion Picture and Television Production Credit Form 3541, California Motion Picture and Television Production Credit, is used to claim the credit on a California income tax return. The taxpayer must have a credit certificate issued by the California Film Commission and may use the credit to offset either taxes due to the FTB or sales and use tax due to the Board of Equalization (BOE). The FTB and BOE will share information received by the California Film Commission to ensure the credit is not taken twice. Form 541, California Fiduciary Income Tax Return For electing small business trusts, the form will provide a computation that adds both income amounts together to compute the mental health surtax, if applicable. Also the FTB will not support electronic filing of Form 541 for 2011 returns. FTB will do more math checks The FTB has advised the tax practitioners that their computers will now be able to verify credit carryovers and will do math checks on individual forms that previously were not checked. While the later affects only paper-filed returns, verifying credit carryovers will help decrease potential FTB notices. 9

10 Important Changes to California Key Forms for 2011 (continued) Pass-through entities Schedule EO has been added to include detailed ownership information. Uncertain tax positions (UTP) If a taxpayer was required to file Schedule UTP on a federal return, it must also be included on the California return. Use the federal form for California if there is a California requirement but no federal requirement. There will also be a question on all California returns asking whether a Schedule UTP is attached. Listed transactions Use federal Form 8886, Reportable Transaction Disclosure Statement, if there is a California-only listed transaction. Use federal Form 8275, Disclosure Statement, if needed for California. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) , (949) , (310) , or (213) California Secretary of State (SOS) No Longer Sending Statement of Information Forms This article is reproduced with permission from Spidell Publishing, Inc. As of September 26, 2011, the SOS is no longer sending blank Statement of Information forms to newlyformed limited liability companies (LLCs) and corporations. They will, however, continue to mail Welcome Letters. Statements of Information for newly formed domestic stock corporations must be filed with the SOS within the first 90 days of filing the Articles of Incorporation, and then every year after that in the month of incorporation. Domestic nonprofit corporations must file also within this 90-day period, but subsequent Statements of Information are then filed every two years in the month of incorporation. Statements of Information for newly formed LLCs must be filed with the SOS within the first 90 days of filing the Articles of Organization, and then every two years after that in the month of organization or registration. The Statement of Information forms for domestic stock and nonprofit corporations Forms SI-100 and SI-200 may be filled out and submitted online. LLCs must print out Form LLC-12 and mail it to the SOS. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) , (949) , (310) , or (213)

11 Banks Will Provide More Information to the California Franchise Tax Board (FTB) in 2012 This article is reproduced with permission from Spidell Publishing, Inc. The FTB is in the process of creating a new data-matching program to assist with the enforcement and collection of state taxes. Under this program, the FTB will receive a quarterly update of detailed banking information and may follow up with financial institutions for more timely information for their collection program. Financial institutions must not inform the taxpayer of the FTB notification. The proposed start date is in April 2012, and levies as a result of the program are expected to start in June The FTB estimates that there will be an increase of 50,000 levies per year. One of the state's challenges in the tax collection process is that 1099 data is not provided by the Internal Revenue Service (IRS) until 18 months after the filing deadline, so information that could be used in tax collections is often outdated by then. As they do now, the FTB will issue a levy for the full amount of state tax due and provide a 10-day holding period for the taxpayer to negotiate before the financial institution remits funds. Taxpayers who are currently suffering a financial hardship can contact the FTB during this period to discuss other payment options to resolve their delinquent account balances. Official regulations for the Financial Institution Record Match (FIRM) program are currently being developed and will have an effective date of April 1, Existing program for collection of child support The matching may only be used for the FTB's collection program and not any other purpose. The program is called the Financial Institution Record Match (FIRM) and is similar to the existing Financial Institution Data Match (FIDM) already used for child support collections. The data provided as part of FIRM is similar to what is already provided with FIDM; however, FIRM is for both individuals and businesses whereas FIDM is only for individuals that could potentially owe child support. FIDM already allows the California Department of Child Support Services (DCSS) to levy an obligor's assets that would otherwise be protected from collection. Specifically, the DCSS may take an enforcement action to collect a child support delinquency by another provision of law, even if: A court has ordered an obligor to make scheduled payments and the obligor is in compliance with that order; 11

12 Banks Will Provide More Information to the California FTB in 2012 (continued) An earnings assignment order that includes an amount for past-due support has been served to the obligor's employer and earnings are being withheld; or At least 50% of the obligor's earnings are being withheld for support. Child support levies FIDM provides that if any of these conditions exist, then the assets of the obligor that are held by a financial institution are subject to levy by the DCSS in accordance with the following: The first $3,500 is exempt from levy without the obligor having to file a claim for exemption; An obligor may file a claim for exemption for an amount that is less than or equal to the total amount levied. The sole basis for a claim for exemption would be financial hardship for the obligor and the obligor's dependents (the DCSS is not considered a judgment creditor and has authority under state income tax law to collect specific debts using remedies such as withholding orders and Orders To Withhold (OTW) that are not currently subject to any exemptions); The local child support agency would be the levying officer for purposes of compliance with current laws regarding the claiming of exemptions (except for their release of property); The local child support agency notifies the DCSS within two business days of receipt of a claim for exemption by an obligor. The DCSS would direct the financial institution subject to the OTW to hold any funds until the DCSS notifies the financial institution to remit or release the funds; The superior court of the county in which the local child support agency is located shall have jurisdiction to determine the amount of exemption allowed; and Within two days of receiving an endorsed copy of the court order regarding the exemption, the local child support agency must provide a copy of the order to the DCSS. The DCSS would then instruct the financial institution to remit or release the obligor's funds as instructed by the court order. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) , (949) , (310) , or (213)

13 Republicans' International Tax Reform Proposals Include Lower Corporate Rate & Shift to Territorial Regime On October 26, Ways & Means Chair Dave Camp (R-MI) released a draft proposal for international tax reform. Two prominent features of the proposal are reducing the maximum corporate tax rate from 35% to 25% for tax years beginning after December 31, 2012, and shifting the U.S.'s international tax regime from a worldwide system to a territorial-based system. In shifting to a territorial system, the plan would specifically: (i) exempt 95% of overseas earnings from U.S. tax when profits are brought back to the U.S., by implementing a 95% deduction for the foreign-source portion of dividends received from controlled foreign corporations (CFCs) by domestic corporations that are 10% U.S. shareholders and that have held the underlying stock for at least one year; and (ii) allow existing overseas profits to be brought back to the U.S. at a 5.25% rate, in line with the current repatriation proposals. According to Rep. Camp, this would encourage companies to reinvest their profits in the U.S. and make American companies more competitive. Additionally, the plan would treat foreign branches of U.S. parent companies as CFCs for which the 95% dividends-received deduction is available, tax royalties paid by a CFC to the U.S. parent at a maximum 15% rate, and treat certain types of passive and highly mobile income as currently included in the U.S. parent's taxable income, whether or not repatriated, and allow foreign tax credits for them. A number of issues, including dual consolidated losses and tax treaty implications, were not addressed in the draft and may require resolution before any of the proposals are finalized. To this end, Ways and Means seeks comments on the following: how to best protect the U.S. tax base while minimizing the effect on the competitiveness of American businesses; the pros and cons of treating foreign branches as CFCs, as opposed to disregarded entities; and how to treat foreign partnerships with U.S. corporate partners owning at least 10% interests. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) , (949) , (310) , or (213)

14 2011 California Tax Charts Reproduced with permission from Spidell Publishing, Inc. 14

15 2011 California Tax Charts (continued) 15

16 Windes & McClaughry is a recognized leader in the field of accounting, assurance, tax, and business consulting services. Our goal is to exceed your expectations by providing timely, high-quality, and personalized service that is directed at improving your bottom-line results. Quality and value-added solutions from your accounting firm are essential steps toward success in today s marketplace. You can depend on Windes & McClaughry to deliver exceptional client service in each engagement. For over eighty-five years, we have gone beyond traditional services to provide proactive solutions and the highest level of capabilities and experience. Windes & McClaughry s team approach allows you to benefit from a breadth of technical expertise and extensive resources. We service a broad range of clients, from high-net-worth individuals and exempt organizations to privately held businesses and publicly traded companies. We act as business advisors, working with you to set strategies, maximize efficiencies, minimize taxes, and take your business to the next level. Recently, Windes & McClaughry announced plans to merge with San Francisco-based Burr Pilger Mayer, Inc. (BPM). The merger, expected to take place in January 2012, will create the largest California-based accounting and consulting firm. For more information, please visit Headquarters 111 West Ocean Boulevard Twenty-Second Floor Long Beach, CA Tel: (562) Los Angeles Office 601 South Figueroa Street Suite 4950 Los Angeles, CA Tel: (213) Orange County Office Von Karman Avenue Suite 1060 Irvine, CA Tel: (949) South Bay Office Hawthorne Boulevard Suite 840 Torrance, CA Tel: (310) Visit us online at: 16