If you are a working parent or look for work this summer, you may need to pay for the care of your child or children. These expenses may qualify for a tax credit that can reduce your federal income taxes. The Child and Dependent Care Tax Credit is available not only while school’s out for summer, but also throughout the year. Here are eight key points the IRS wants you to know about this credit.

1. You must pay for care so you – and your spouse if filing jointly – can work or actively look for work. Your spouse meets this test during any month they are full-time student, or physically or mentally incapable of self-care.

2. You must have earned income. Earned income includes earnings such as wages and self-employment. If you are married filing jointly, your spouse must also have earned income. There is an exception to this rule for a spouse who is full-time student or who is physically or mentally incapable of self-care.

3. You must pay for the care of one or more qualifying persons. Qualifying children under age 13 who you claim as a dependent meet this test. Your spouse or dependent who lived with you for more than half the year may meet this test if they are physically or mentally incapable of self-care.

4. You may qualify for the credit whether you pay for care at home, at a daycare facility outside the home or at a day camp. If you pay for care in your home, you may be a household employer. For more information, see Publication 926, Household Employer's Tax Guide.

5. The credit is a percentage of the qualified expenses you pay for the care of a qualifying person. It can be up to 35 percent of your expenses, depending on your income.

6. You may use up to $3,000 of the unreimbursed expenses you pay in a year for one qualifying person or $6,000 for two or more qualifying person.

7. Expenses for overnight camps or summer school tutoring do not qualify. You cannot include the cost of care provided by your spouse or a person you can claim as your dependent. If you get dependent care benefits from your employer, special rules apply.

When summer vacation begins, classroom learning ends for most students. Even so, summer doesn’t have to mean a complete break from learning. Students starting summer jobs have the opportunity to learn some important life lessons. Summer jobs offer students the opportunity to learn about the working world – and taxes.

Here are six things about summer jobs that the IRS wants students to know.

1. As a new employee, you’ll need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to figure how much federal income tax to withhold from workers’ paychecks. It is important to complete your W-4 form correctly so your employer withholds the right amount of taxes. You can use the IRS Withholding Calculator tool at IRS.gov to help you fill out the form.

2. If you’ll receive tips as part of your income, remember that all tips you receive are taxable. Keep a daily log to record your tips. If you receive $20 or more in cash tips in any one month, you must report your tips for that month to your employer.

3. Maybe you’ll earn money doing odd jobs this summer. If so, keep in mind that earnings you receive from self-employment are subject to income tax. Self-employment can include pay you get from jobs like baby-sitting and lawn mowing. 

4. You may not earn enough money from your summer job to owe income tax, but you will probably have to pay Social Security and Medicare taxes. Your employer usually must withhold these taxes from your paycheck. Or, if you’re self-employed, you may have to pay self-employment taxes. Your payment of these taxes contributes to your coverage under the Social Security system.

5. If you’re in ROTC, your active duty pay, such as pay received during summer camp, is taxable. However, the food and lodging allowances you receive in advanced training are not.

6. If you’re a newspaper carrier or distributor, special rules apply to your income. Whatever your age, you are treated as self-employed for federal tax purposes if:

• You are in the business of delivering newspapers.
• Substantially all your pay for these services directly relates to sales rather than to the number of hours worked.
• You work under a written contract that states the employer will not treat you as an employee for federal tax purposes.

WASHINGTON — A key deadline of May 15 is facing many tax-exempt organizations that are required by law to file annual reports with the Internal Revenue Service. Organizations will see their federal tax exemptions automatically revoked if they have not filed reports for three consecutive years.

The Pension Protection Act of 2006 mandates that most tax-exempt organizations file annual Form 990-series informational returns or notices with the IRS. Under this law, organizations that fail to file reports for three consecutive years automatically lose their federal tax-exempt status. The law, which went into effect at the beginning of 2007, also imposed a new annual filing requirement on small organizations. Churches and church-related organizations are not required to file annual reports.

Form 990-series information returns and notices are due on the 15^th day of the fifth month after an organization’s fiscal year ends. Organizations that need additional time to file may obtain anextension.

Many organizations use the calendar year as their fiscal year, which makes May 15 the deadline for them. Organizations that fail to file annual reports for three consecutive years will see their tax exemptions automatically revoked as of the due date of the third required filing.

Small tax-exempt organizations with average annual receipts of $50,000 or less may file an electronic notice called a Form 990-N (e-Postcard), which asks organizations for a few basic pieces of information. Tax-exempt organizations with average annual receipts above $50,000 must file aForm 990 or 990-EZ, depending on their receipts and assets. Private foundations file a Form 990-PF.

The IRS began to publish the names of organizations identified as having automatically lost their tax-exempt status for failing to file annual reports for three consecutive years. Organizations that have had their exemptions automatically revoked and wish to have that status reinstated must file an application for exemption and pay the appropriate user fee.

The IRS offers an online search tool, Exempt Organizations Select Check, to help users more easily find key information about the federal tax status and filings of certain tax-exempt organizations, including whether organizations have had their federal tax exemptions automatically revoked.

The Consumer Action Handbook is your go-to guide for practical information to help you plan a purchase, know your consumer rights, and file a consumer complaint. The Handbook features new content in areas that matter to you, such as banking, housing, and protecting your privacy, as well as tips to alert you of the latest frauds and scams.

Use the updated Consumer Assistance Directory to contact corporate consumer affairs departments, national consumer organizations, and  local, state, and federal government offices. The Handbook also includes a sample complaint letter for when you need to file a complaint about a product you purchased.

Order your free copies of the Handbook or the Spanish language version, Guía del Consumidor.

The following questions and answers provide employers and payroll service providers information that will help them as they prepare to implement the Additional Medicare Tax which goes into effect in 2013. The Additional Medicare Tax applies to individuals’ wages, other compensation, and self-employment income over certain thresholds; employers are responsible for withholding the tax on wages and other compensation in certain circumstances. The IRS has prepared these questions and answers to assist employers and payroll service providers in adapting systems and processes that may be impacted.

BASIC FAQs

1. When does Additional Medicare Tax start?
   Additional Medicare Tax applies to wages and compensation above a threshold amount received after December 31, 2012 and to self-employment income above a threshold amount received in taxable years beginning after December 31, 2012.
2. What is the rate of Additional Medicare Tax?
   The rate is 0.9 percent.
3. When are individuals liable for Additional Medicare Tax?
   An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:
   

   Filing Status	Threshold Amount
   Married filing jointly	$250,000
   Married filing separately	$125,000
   Single	$200,000
   Head of household (with qualifying person)	$200,000
   Qualifying widow(er) with dependent child	$200,000

4. What wages are subject to Additional Medicare Tax?
   All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual’s filing status. For more information on what wages are subject to Medicare Tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15, (Circular E), Employer’s Tax Guide.
5. What Railroad Retirement Tax Act (RRTA) compensation is subject to Additional Medicare Tax?
   All RRTA compensation that is currently subject to Medicare Tax is subject to Additional Medicare Tax if it is paid in excess of the applicable threshold for an individual’s filing status. All FAQs that discuss the application of the Additional Medicare Tax to wages also apply to RRTA compensation, unless otherwise indicated.
6. Are nonresident aliens and U.S. citizens living abroad subject to Additional Medicare Tax?
   There are no special rules for nonresident aliens and U.S. citizens living abroad for purposes of this provision. Wages, other compensation, and self-employment income that are subject to Medicare tax will also be subject to Additional Medicare Tax if in excess of the applicable threshold.
7. Additional Medicare Tax goes into effect for taxable years beginning after December 31, 2012; however, the proposed regulations (REG-130074-11) are not effective until after the notice and comment period has ended and final regulations have been published in the Federal Register. How will this affect Additional Medicare Tax requirements for employers, employees, or self-employed?
   Additional Medicare Tax applies to wages, compensation, and self-employment income received in tax years beginning after December 31, 2012. Taxpayers must comply with the law as of that date. With regard to specific matters discussed in the proposed regulations, taxpayers may rely on the proposed regulations for tax periods beginning before the date that the final regulations are published in the Federal Register. If any requirements change in the final regulations, taxpayers will only be responsible for complying with the new requirements from the effective date of the final regulations.

INDIVIDUAL FAQs

1. Will Additional Medicare Tax be withheld from an individual's wages?
   An employer must withhold Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a calendar year, without regard to the individual’s filing status or wages paid by another employer.  An individual may owe more than the amount withheld by the employer, depending on the individual’s filing status, wages, compensation, and self-employment income.  In that case, the individual should make estimated tax payments and/or request additional income tax withholding using Form W-4, Employee's Withholding Allowance Certificate.
2. Will Additional Medicare Tax be withheld from an individual’s compensation subject to Railroad Retirement Tax Act (RRTA) taxes?
   An employer must withhold Additional Medicare Tax from RRTA compensation it pays to an individual in excess of $200,000 in a calendar year without regard to the individual’s filing status or compensation paid by another employer.  An individual may owe more than the amount withheld by the employer, depending on the individual’s filing status, wages, compensation, and self-employment income.  In that case, the individual should make estimated tax payments and/or request additional income tax withholding using Form W-4, Employee's Withholding Allowance Certificate.
3. Can I request additional withholding specifically for Additional Medicare Tax?
   No. However, if you anticipate liability for Additional Medicare Tax, you may request that your employer withhold an additional amount of income tax withholding on Form W-4. The additional income tax withholding will be applied against your taxes shown on your individual income tax return (Form 1040), including any Additional Medicare Tax liability.
4. Will I need to make estimated tax payments for Additional Medicare Tax?
   If you anticipate that you will owe Additional Medicare Tax but will not satisfy the liability through Additional Medicare Tax withholding and did not request additional income tax withholding using Form W-4, you may need to make estimated tax payments. You should consider your estimated total tax liability in light of your wages, other compensation, and self-employment income, and the applicable threshold for your filing status when determining whether estimated tax payments are necessary.
5. Does an individual who makes estimated tax payments to pay an expected liability for Additional Medicare Tax need to identify the payments as specifically for this tax?
   No. An individual cannot designate any estimated payments specifically for Additional Medicare Tax. Any estimated tax payments that an individual makes will apply to any and all tax liabilities on the individual income tax return (Form 1040), including any Additional Medicare Tax liability.
6. Will individuals calculate Additional Medicare Tax liability on their income tax returns?
   Yes. Individuals liable for Additional Medicare Tax will calculate Additional Medicare Tax liability on their individual income tax returns (Form 1040).  Individuals will also report Additional Medicare Tax withheld by their employers on their individual tax returns.  Any Additional Medicare Tax withheld by an employer will be applied against all taxes shown on an individual’s income tax return, including any Additional Medicare Tax liability.
7. Will an individual owe Additional Medicare Tax on all wages, compensation, and/or self-employment income or just the wages, compensation, and/or self-employment income in excess of the threshold for the individual’s filing status?
   An individual will owe Additional Medicare Tax on wages, compensation, and/or self-employment income (and that of the individual’s spouse if married filing jointly) that exceed the applicable threshold for the individual’s filing status. For married persons filing jointly the threshold is $250,000, for married persons filing separately the threshold is $125,000, and for all others the threshold is $200,000.
8. If my employer withholds Additional Medicare Tax from my wages in excess of $200,000, but I won't owe the tax because my spouse and I file a joint return and we won't meet the $250,000 threshold for joint filers, can I ask my employer to stop withholding Additional Medicare Tax?
   No. Your employer must withhold Additional Medicare Tax on wages it pays to you in excess of $200,000 in a calendar year. Your employer cannot honor a request to cease withholding Additional Medicare Tax if it is required to withhold it. You will claim credit for any withheld Additional Medicare Tax against the total tax liability shown on your individual income tax return (Form 1040).
9. What should I do if I have two jobs and neither employer withholds Additional Medicare Tax, but the sum of my wages exceeds the threshold at which I will owe the tax?
   If you anticipate that you will owe Additional Medicare Tax but will not satisfy the liability through Additional Medicare Tax withholding (for example, because you will not be paid wages in excess of $200,000 in a calendar year by an employer), you should make estimated tax payments and/or request additional income tax withholding using Form W-4. For information on making estimated tax payments and requesting an additional amount be withheld from each paycheck, see Publication 505, Tax Withholding and Estimated Tax.
10. Are wages that are not paid in cash, such as fringe benefits, subject to Additional Medicare Tax?
    Yes, the value of taxable wages not paid in cash, such as noncash fringe benefits, are subject to Additional Medicare Tax, if, in combination with other wages, they exceed the individual’s applicable threshold.  Noncash wages are subject to Additional Medicare Tax withholding, if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold.
11. Are tips subject to Additional Medicare Tax?
    Yes, tips are subject to Additional Medicare Tax, if, in combination with other wages, they exceed the individual’s applicable threshold. Tips are subject to Additional Medicare Tax withholding, if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold.
12. How do individuals calculate Additional Medicare Tax if they have wages subject to Federal Insurance Contributions Act (FICA) tax and self-employment income subject to Self-Employment Contributions Act (SECA) tax?
    
    Individuals with wages subject to FICA tax and self-employment income subject to SECA tax calculate their liabilities for Additional Medicare Tax in three steps:
    
    Step 1 Calculate Additional Medicare Tax on any wages in excess of the applicable threshold for the filing status, without regard to whether any tax was withheld.
    
    Step 2 Reduce the applicable threshold for the filing status by the total amount of Medicare wages received - but not below zero.
    
    Step 3 Calculate Additional Medicare Tax on any self-employment income in excess of the reduced threshold.
    
    Example 1: C, a single filer, has $130,000 in wages and $145,000 in self-employment income.
    
    1. C’s wages are not in excess of the $200,000 threshold for single filers, so C is not liable for Additional Medicare Tax on these wages.
    2. Before calculating the Additional Medicare Tax on self-employment income, the $200,000 threshold for single filers is reduced by C’s $130,000 in wages, resulting in a reduced self-employment income threshold of $70,000.
    3. C is liable to pay Additional Medicare Tax on $75,000 of self-employment income ($145,000 in self-employment income minus the reduced threshold of $70,000).

Example 2: D and E are married and file jointly. D has $150,000 in wages and E has $175,000 in self-employment income.

1. 1. D’s wages are not in excess of the $250,000 threshold for joint filers, so D and E are not liable for Additional Medicare Tax on D’s wages.
   2. Before calculating the Additional Medicare Tax on E’s self-employment income, the $250,000 threshold for joint filers is reduced by D’s $150,000 in wages resulting in a reduced self-employment income threshold of $100,000.
   3. D and E are liable to pay Additional Medicare Tax on $75,000 of self-employment income ($175,000 in self-employment income minus the reduced threshold of $100,000).

1. Example 3: F, who is married and files separately, has $175,000 in wages and $50,000 in self-employment income.

   1. F is liable to pay Additional Medicare Tax on $50,000 of his wages ($175,000 minus the $125,000 threshold for married persons who file separately).
   2. Before calculating the Additional Medicare Tax on self-employment income, the $125,000 threshold for married persons who file separately is reduced by F’s $175,000 in wages to $0 (reduced, but not below zero).
   3. F is liable to pay Additional Medicare Tax on $50,000 of self-employment income ($50,000 in self-employment income minus the reduced threshold of $0).
   4. In total, F is liable to pay Additional Medicare Tax on $100,000 ($50,000 of his wages and $50,000 of his self-employment income).

   Example 4: G, a head of household filer, has $225,000 in wages and $50,000 in self-employment income. G’s employer withheld Additional Medicare Tax on $25,000 ($225,000 minus the $200,000 withholding threshold).

   1. G is liable to pay Additional Medicare Tax on $25,000 of her wages ($225,000 minus the $200,000 threshold for head of household filers).
   2. Before calculating the Additional Medicare Tax on self-employment income, the $200,000 threshold for head of household filers is reduced by G’s $225,000 in wages to $0 (reduced, but not below zero).
   3. G is liable to pay Additional Medicare Tax on $50,000 of self-employment income ($50,000 in self-employment income minus the reduced threshold of $0).
   4. In total, G is liable to pay Additional Medicare Tax on $75,000 ($25,000 of her wages and $50,000 of her self-employment income).
   5. The Additional Medicare Tax withheld by G’s employer will be applied against all taxes shown on her individual income tax return, including any Additional Medicare Tax liability.

1. How do individuals calculate Additional Medicare Tax if they have compensation subject to Railroad Retirement Tax Act (RRTA) taxes and wages subject to Federal Insurance Contributions Act (FICA) tax? 
   Compensation subject to RRTA taxes and wages subject to FICA tax are not combined to determine Additional Medicare Tax liability. The threshold applicable to an individual’s filing status is applied separately to each of these categories of income.
   Example:  J and K, are married and file jointly.  J has $190,000 in wages subject to Medicare tax and K has $150,000 in compensation subject to RRTA taxes. J and K do not combine their wages and RRTA compensation to determine whether they are in excess of the $250,000 threshold for a joint return.  J and K are not liable to pay Additional Medicare Tax because J’s wages are not in excess of the $250,000 threshold and K’s RRTA compensation is not in excess of the $250,000 threshold.
2. How do individuals calculate Additional Medicare Tax if they have compensation subject to Railroad Retirement Tax Act (RRTA) taxes and self-employment income subject to Self-Employment Contributions Act (SECA) tax?  
   The threshold applicable to an individual’s filing status is applied separately to RRTA compensation and self-employment income. In calculating Additional Medicare Tax on self-employment income, an individual does not reduce the applicable threshold for the taxpayer's filing status by the total amount of RRTA compensation.
   Example: F and G are married and file jointly.  F has $160,000 in self-employment income and G has $140,000 in compensation subject to RRTA taxes. The $140,000 of RRTA compensation does not reduce the threshold at which Additional Medicare Tax applies to self-employment income. F and G are not liable to pay Additional Medicare Tax because F's self-employment income is not in excess of the $250,000 threshold and G’s RRTA compensation is not in excess of the $250,000 threshold.
3. Will I also owe net investment income tax on my income that is subject to Additional Medicare Tax?
   No. The new tax imposed by section 1411 on an individual’s net investment income is not applicable to FICA wages, RRTA compensation, or self-employment income. Thus, an individual will not owe net investment income tax on these categories of income, regardless of the taxpayer’s filing status. See more information on the Net Investment Income Tax.

EMPLOYER and PAYROLL SERVICE PROVIDER FAQs

1. When must an employer withhold Additional Medicare Tax?
   The statute requires an employer to withhold Additional Medicare Tax on wages it pays to an employee in excess of $200,000 in a calendar year, beginning January 1, 2013. An employer has this withholding obligation even though an employee may not be liable for Additional Medicare Tax because, for example, the employee’s wages together with that of his or her spouse do not exceed the $250,000 threshold for joint return filers. Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual’s income tax return (Form 1040).
2. Is an employer liable for Additional Medicare Tax even if it does not withhold it from an employee’s wages? 
   An employer that does not deduct and withhold Additional Medicare Tax as required is liable for the tax unless the tax that it failed to withhold from the employee’s wages is paid by the employee.  Even if not liable for the tax, an employer that does not meet its withholding, deposit, reporting, and payment responsibilities for Additional Medicare Tax may be subject to all applicable penalties. 
3. Is an employer required to notify an employee when it begins withholding Additional Medicare Tax?
   No. There is no requirement that an employer notify its employee.
4. Is there an “employer match” for Additional Medicare Tax (as there is with the regular Medicare tax)? 
   No. There is no employer match for Additional Medicare Tax.
5. May an employee request additional withholding specifically for Additional Medicare Tax?
   No. However, an employee who anticipates liability for Additional Medicare Tax may request that his or her employer withhold an additional amount of income tax withholding on Form W-4. This additional income tax withholding will be applied against all taxes shown on the individual’s income tax return (Form 1040), including any Additional Medicare Tax liability.
6. If an employee’s annual Medicare wages are expected to be over $200,000, will an employer withhold Additional Medicare Tax from the beginning of the year or only after Medicare wages are actually paid in excess of $200,000 year-to-date?
   An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of $200,000 to an employee.
7. If a single payment of wages to an employee exceeds the $200,000 withholding threshold, will an employer withhold Additional Medicare Tax on the entire payment?
   No. Additional Medicare Tax withholding applies only to wages paid to an employee that are in excess of $200,000 in a calendar year. Withholding rules for this tax are different than the income tax withholding rules for supplemental wages in excess of $1,000,000 as explained in Publication 15, section 7.
   Example: M received $180,000 in wages through November 30, 2013. On December 1, 2013, M’s employer paid her a bonus of $50,000. M’s employer is required to withhold Additional Medicare Tax on $30,000 of the $50,000 bonus and may not withhold Additional Medicare Tax on the other $20,000. M's employer also must withhold Additional Medicare Tax on any other wages paid in December 2013.
8. I have two employees who are married to each other. Each earns $150,000, so I know that their combined wages will exceed the threshold applicable to married couples that file jointly. Do I need to withhold Additional Medicare tax?
   No. An employer should not combine wages it pays to two employees to determine whether to withhold Additional Medicare Tax. An employer is required to withhold Additional Medicare Tax only when it pays wages in excess of $200,000 in a calendar year to an employee.
9. What should an employer do if an employee receives wages that are not paid in cash, such as taxable fringe benefits, from which Additional Medicare Tax cannot be withheld?
   If an employee receives wages from an employer in excess of $200,000 and the wages include taxable noncash fringe benefits, the employer calculates wages for purposes of withholding Additional Medicare Tax in the same way that it calculates wages for withholding the existing Medicare tax.  The employer is required to withhold Additional Medicare Tax on total wages, including taxable noncash fringe benefits, in excess of $200,000.  The value of taxable noncash fringe benefits must be included in wages and the employer must withhold the applicable Additional Medicare Tax and deposit the tax under the rules for employment tax withholding and deposits that apply to taxable noncash fringe benefits. Additional information on how to withhold tax on taxable noncash fringe benefits is available in Publication 15 (Circular E), section 5, and Publication 15-B, section 4.
10. If an employee receives tips and other wages in excess of $200,000 in the calendar year, how is Additional Medicare Tax paid on the tips?
    To the extent that tips and other wages exceed $200,000, an employer applies the same withholding rules for Additional Medicare Tax as it does currently for Medicare tax. An employer withholds Additional Medicare Tax on the employee’s reported tips from wages it pays to the employee.

If the employee does not receive enough wages for the employer to withhold all the taxes that the employee owes, including Additional Medicare Tax, the employee may give the employer money to pay the rest of the taxes.  If the employee does not give the employer money to pay the taxes, then the employer makes a current period adjustment on Form 941, Employer’s QUARTERLY Federal Tax Return (or the employer’s applicable employment tax return), to reflect any uncollected employee social security, Medicare, or Additional Medicare Tax on reported tips. However, unlike the uncollected portion of the regular (1.45%) Medicare tax, the uncollected Additional Medicare Tax is not reported in box 12 of Form W-2 with code B.

The employee may need to make estimated tax payments to cover any shortage. More information about this process of giving an employer money for taxes is available in Publication 531, Reporting Tip Income.

1. If a former employee receives group-term life insurance coverage in excess of $50,000 and the cost of the coverage, in combination with other wages, exceeds $200,000, how does an employer report Additional Medicare Tax on this?
   The imputed cost of coverage in excess of $50,000 is subject to social security and Medicare taxes, and to the extent that, in combination with other wages, it exceeds $200,000, it is also subject to Additional Medicare Tax withholding. However, when group-term life insurance over $50,000 is provided to an employee (including retirees) after his or her termination, the employee share of social security and Medicare taxes and Additional Medicare Tax on that period of coverage is paid by the former employee with his or her tax return and is not collected by the employer. In this case, an employer should report this income as wages on Form 941, Employer’s QUARTERLY Federal Tax Return (or the employer’s applicable employment tax return), and make a current period adjustment to reflect any uncollected employee social security, Medicare, or Additional Medicare Tax on group-term life insurance. However, unlike the uncollected portion of the regular (1.45%) Medicare tax, an employer may not report the uncollected Additional Medicare Tax in box 12 of Form W-2 with code N.
2. For employees who receive third-party sick pay, will wages paid by an employer and by the third party need to be aggregated to determine whether the $200,000 withholding threshold has been met?
   Yes. Wages paid by an employer and by the third party need to be aggregated to determine whether the $200,000 withholding threshold has been met. The same rules that currently assign responsibility for sick pay reporting and payment of Medicare tax based on which party is treated as the employer (that is, the employer, the employer’s agent, or a third party that is not the employer’s agent) apply also to Additional Medicare Tax. For more information on sick pay, see Publication 15-A, Employer’s Supplemental Tax Guide, and Notice 91-26, 1991-2 C.B. 619.
3. If an employee has amounts deferred under a nonqualified deferred compensation (NQDC) plan, when is the nonqualified deferred compensation taken into account as wages for purposes of withholding Additional Medicare Tax? 
   An employer calculates wages for purposes of withholding Additional Medicare Tax from nonqualified deferred compensation (NQDC) in the same way that it calculates wages for withholding the existing Medicare tax from NQDC. Thus, if an employee has amounts deferred under a nonqualified deferred compensation plan and the NQDC is taken into account as wages for FICA tax purposes under the special timing rule described in §31.3121(v)(2)-1(a)(2) of the Employment Tax Regulations, the NQDC would likewise be taken into account under the special timing rule for purposes of determining an employer’s obligation to withhold Additional Medicare Tax. Additional information about the special timing rules for NQDC is in Publication 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration.
4. For a company that goes through a merger or acquisition, will the wages from the predecessor and successor employers be combined to determine whether the $200,000 withholding threshold has been met?
   When corporate acquisitions meet certain requirements, wages paid by the predecessor are treated as if paid by the successor for purposes of applying the social security wage base and for applying the Additional Medicare Tax withholding threshold (that is, $200,000 in a calendar year). For more information on acquisitions under the predecessor-successor rules, see Rev. Proc. 2004-53, 2004-2 C.B. 320; Schedule D (Form 941), Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations; and the Instructions for Schedule D (Form 941).
5. Should an employer combine an employee’s wages for services performed for all of its subsidiaries if it has an employee who performs services for more than one subsidiary in its company, but the payroll is paid through one of the subsidiaries?
   An employer is required to withhold Additional Medicare Tax on wages paid to an employee in excess of $200,000 in a calendar year. When an employee is performing services for multiple subsidiaries of a company, and each subsidiary is an employer of the employee with regard to the services the employee performs for that subsidiary, the wages paid by the payor on behalf of each subsidiary should be combined only if the payor is a common paymaster. Publication 15-A, section 7 contains more information on common paymasters. The wages are not combined for purposes of the $200,000 withholding threshold if the payor is not a common paymaster. 
6. I am a common paymaster that pays wages to an employee who is concurrently employed by related corporations. Should I combine this employee's wages for purposes of determining whether wages are paid in excess of the $200,000 withholding threshold?
   Yes. Liability to withhold Additional Medicare Tax with respect to wages disbursed by the common paymaster is computed as if there was a single employer, just as it is for application of the social security wage base. See section 7 of Publication 15-A for more information on common paymasters.
7. If an agent pays wages to an employee on behalf of an employer (under an approved Form 2678, Employer Appointment of Agent), then, for purposes of determining whether wages are paid in excess of the $200,000 withholding threshold, should the agent combine those wages with wages paid to that same employee

• directly by the employer,
• by the same agent on behalf of a different employer, or
• by another agent on behalf of the same employer?

No. Wages paid by an agent with an approved Form 2678 on behalf of an employer should not be combined with wages paid to the same employee by any of the above other parties in determining whether to withhold Additional Medicare Tax.

1. I use an employee leasing company. How should wages be determined for purposes of the $200,000 withholding threshold? 
   An employer is required to withhold Additional Medicare Tax on wages paid to an employee in excess of $200,000 in a calendar year. Generally, if you provide wages in excess of the $200,000 withholding threshold to the employee leasing company to pay to an employee that performs services for you, Additional Medicare Tax should be withheld from the wages in excess of $200,000. Taxpayers should be aware that the employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though you forward tax payments to a third party to make the tax deposits, you may be responsible as the employer for the tax liability.
2. Will the IRS be changing Form 941 or any other forms for tax year 2013 to be completed by employers and payroll service providers?
   Yes.  For example, a line will be added to Form 941 on which employers will report any individual’s wages paid during the quarter that is in excess of $200,000 for the year, and on which employers will report their withholding liability for Additional Medicare Tax on those wages. The existing line, on which employers report the liability for regular Medicare tax on all wages, will remain unchanged.

However, there will be no change to Form W-2. Additional Medicare Tax withholding on wages subject to Federal Insurance Contributions Act (FICA) taxes will be reported in combination with withholding of regular Medicare tax in box 6 (“Medicare tax withheld”).

The IRS plans to release drafts of revised forms, including Forms 941, 943, and the tax return schemas for the F94X series of returns.

1. When an employer deposits Additional Medicare Tax through the Electronic Federal Tax Payment System (EFTPS), does it need to separate Additional Medicare Tax from regular Medicare tax?
   No. When providing the deposit detail, regular Medicare tax and Additional Medicare Tax are entered as one combined amount.
2. If an employer underwithholds Additional Medicare Tax (for example, fails to withhold the tax when it pays the employee wages in excess of $200,000 in a calendar year) and discovers the error in the same year the wages are paid but after its Form 941 is filed, how can the employer correct this error?
   An employer is liable for Additional Medicare Tax required to be withheld, whether or not it deducts the tax from wages it pays to the employee. If the employer fails to withhold the correct amount of Additional Medicare Tax from wages it pays to an employee and discovers the error in the same year it pays the wages, the employer may correct the error by making an interest-free adjustment on the appropriate corrected return (for example, Form 941-X). Once the employer has discovered the error, the employer should deduct the correct amount of Additional Medicare Tax from other wages or other remuneration, if any, it pays to the employee on or before the last day of the calendar year. However, even if the employer is not able to deduct the correct amount of Additional Medicare Tax from other wages or other remuneration it pays to the employee, the employer must report and pay the correct amount of Additional Medicare Tax on its return. If the employer pays Additional Medicare Tax without having deducted it from wages or other remuneration it pays to the employee, the obligation of the employee to the employer with respect to the payment is a matter for settlement between the employer and the employee. For more information on adjustments, see section 13 of Pub 15 or visit the IRS website and enter the keywords Correcting Employment Taxes.   
3. If an employer overwithholds Additional Medicare Tax (for example, withholds the tax before it pays the employee wages in excess of $200,000 in a calendar year) and discovers the error in the same year the wages are paid, how can the employer correct this error?
   The employer may correct the error by making an interest-free adjustment on the appropriate corrected return (for example, Form 941-X). The employer must first repay or reimburse the overwithheld amount to the employee prior to the end of the calendar year in which it paid the wages. If the employer does not repay or reimburse the employee the amount of overcollected Additional Medicare Tax before the end of the year in which the wages were paid, the employer should not correct the error via an interest-free adjustment. In this case, the employer should report the amount of withheld Additional Medicare Tax on the employee’s Form W-2 so that the employee may obtain credit for Additional Medicare Tax withheld on the employee’s individual income tax return. For more information on adjustments, see section 13 of Pub 15 or visit theIRS website and enter the keywords Correcting Employment Taxes.
4. If an employer overwithholds Additional Medicare Tax (for example, withholds the tax before it pays the employee wages in excess of $200,000 in a calendar year) from an employee’s wages, should the employer file a claim for refund for the Additional Medicare Tax?
   No.  An employer should only claim a refund of overpaid Additional Medicare Tax if it did not deduct or withhold the overpaid Additional Medicare Tax from the employee’s wages. The employer should correct the error by making an interest-free adjustment on the appropriate corrected return (for example, Form 941-X). For more information on claims for refund, see section 13 of Pub 15 or visit the IRS website and enter the keywords Correcting Employment Taxes.
5. If an employer underwithholds Additional Medicare Tax (for example, fails to withhold the tax when it pays the employee wages in excess of $200,000 in a calendar year) and discovers the error in a subsequent year, should the employer correct this error by making an interest-free adjustment?
   No. If an employer underwithholds Additional Medicare Tax and does not discover the error in the same year wages were paid, the employer should not correct the error by making an interest-free adjustment. However, to the extent the employer can show that the employee paid Additional Medicare Tax, the underwithheld amount will not be collected from the employer. The employer will remain subject to any applicable penalties.
6. If an employer overwithholds Additional Medicare Tax (for example, withholds the tax before it pays the employee wages in excess of $200,000 in a calendar year) and discovers the error in a subsequent year, should the employer correct this error by making an interest-free adjustment?
   No. If an employer withholds more than the correct amount of Additional Medicare Tax from wages paid to an employee and does not discover the error in the same year the wages were paid, the employer should not correct the error by making an interest-free adjustment. In this case, the employer should report the amount of withheld Additional Medicare Tax on the employee’s Form W-2 so that the employee may obtain credit for Additional Medicare Tax withheld. Additional Medicare Tax withholding will be applied against the taxes shown on the employee’s individual income tax return (Form 1040).

April 15 is the annual deadline for most people to file their federal income tax return and pay any taxes they owe. By law, the IRS may assess penalties to taxpayers for both failing to file a tax return and for failing to pay taxes they owe by the deadline.

Here are eight important points about penalties for filing or paying late.

1. A failure-to-file penalty may apply if you did not file by the tax filing deadline. A failure-to-pay penalty may apply if you did not pay all of the taxes you owe by the tax filing deadline.

2. The failure-to-file penalty is generally more than the failure-to-pay penalty. You should file your tax return on time each year, even if you’re not able to pay all the taxes you owe by the due date. You can reduce additional interest and penalties by paying as much as you can with your tax return. You should  explore other payment options such as getting a loan or making an installment agreement to make payments. The IRS will work with you.

3. The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.

4. If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.

5. If you timely requested an extension of time to file your individual income tax return and paid at least 90 percent of the taxes you owe with your request, you may not face a failure-to-pay penalty. However, you must pay any remaining balance by the extended due date.

6. If both the 5 percent failure-to-file penalty and the ½ percent failure-to-pay penalties apply in any month, the maximum penalty that you’ll pay for both is 5 percent.

7. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

8. You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time.

It’s sad but true. Following major disasters and tragedies, scam artists impersonate charities to steal money or get private information from well-intentioned taxpayers. Fraudulent schemes involve solicitations by phone, social media, email or in-person.

Scam artists use a variety of tactics. Some operate bogus charities that contact people by telephone to solicit money or financial information. Others use emails to steer people to bogus websites to solicit funds, allegedly for the benefit of tragedy victims. The fraudulent websites often mimic the sites of legitimate charities or use names similar to legitimate charities. They may claim affiliation with legitimate charities to persuade members of the public to send money or provide personal financial information. Scammers then use that information to steal the identities or money of their victims.

The IRS offers the following tips to help taxpayers who wish to donate to victims of the recent tragedies at the Boston Marathon and a Texas fertilizer plant:

• Donate to qualified charities.  Use the Exempt Organizations Select Check tool at IRS.gov to find qualified charities. Only donations to qualified charitable organizations are tax-deductible. You can also find legitimate charities on the Federal Emergency Management Agency (FEMA) Web site at fema.gov.
• Be wary of charities with similar names.  Some phony charities use names that are similar to familiar or nationally known organizations. They may use names or websites that sound or look like those of legitimate organizations.
• Don’t give out personal financial information.  Do not give your Social Security number, credit card and bank account numbers and passwords to anyone who solicits a contribution from you. Scam artists use this information to steal your identity and money.
• Don’t give or send cash.  For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the donation.
• Report suspected fraud.  Taxpayers suspecting tax or charity-related fraud should visit IRS.gov and perform a search using the keywords “Report Phishing.”

For most taxpayers, the tax deadline has passed. But planning for next year can start now. The IRS reminds taxpayers that being organized and planning ahead can save time and money in 2014. Here are five things you can do now to make next April 15th easier.

1. Adjust your withholding.  Each year, millions of American workers have far more taxes withheld from their pay than is required. Now is a good time to review your withholding to make the taxes withheld from your pay closer to the taxes you’ll owe for this year. This is especially true if you normally get a large refund and you would like more money in your paycheck. If you owed tax when you filed, you may need to increase the federal income tax withheld from your wages. Use the IRS Withholding Calculator at IRS.gov to complete a new Form W-4, Employee's Withholding Allowance Certificate.

2. Store your return in a safe place.  Put your 2012 tax return and supporting documents somewhere safe. If you need to refer to your return in the future, you’ll know where to find it. For example, you may need a copy of your return when applying for a home loan or financial aid. You can also use it as a helpful guide for next year's return.

3. Organize your records.  Establish one location where everyone in your household can put tax-related records during the year. This will avoid a scramble for misplaced mileage logs or charity receipts come tax time.

4. Shop for a tax professional.  If you use a tax professional to help you with tax planning, start your search now. You’ll have more time when you're not up against a deadline or anxious to receive your tax refund. Choose a tax professional wisely. You’re ultimately responsible for the accuracy of your own return regardless of who prepares it. Find tips for choosing a preparer at IRS.gov.

5. Consider itemizing deductions.  If you usually claim a standard deduction, you may be able to reduce your taxes if you itemize deductions instead. If your itemized deductions typically fall just below your standard deduction, you can ‘bundle’ your deductions. For example, an early or extra mortgage payment or property tax payment, or a planned donation to charity could equal some tax savings. See the Schedule A, Itemized Deductions, instructions for the list of items you can deduct. Planning an approach now that works best for you can pay off at tax time next year.

Certain financial debts from your past may affect your current federal tax refund. The law allows the use of part or all of your federal tax refund to pay other federal or state debts that you owe.

Here are six facts from the IRS that you should know about tax refund ‘offsets.’

1. A tax refund offset generally means the U.S. Treasury has reduced your federal tax refund to pay for certain unpaid debts.
2. The Treasury Department’s Financial Management Service is the agency that issues tax refunds and conducts the Treasury Offset Program.
3. If you have unpaid debts, such as overdue child support, state income tax or student loans, FMS may apply part or all of your tax refund to pay that debt.
4. You will receive a notice from FMS if an offset occurs. The notice will include the original tax refund amount and your offset amount. It will also include the agency receiving the offset payment and that agency’s contact information.
5. If you believe you do not owe the debt or you want to dispute the amount taken from your refund, you should contact the agency that received the offset amount, not the IRS or FMS.
6. If you filed a joint tax return, you may be entitled to part or all of the refund offset. This rule applies if your spouse is solely responsible for the debt. To request your part of the refund, file Form 8379, Injured Spouse Allocation. Form 8379 is available on IRS.gov or by calling 1-800-829-3676.

Each year, the IRS sends millions of letters and notices to taxpayers for a variety of reasons. Here are ten things you should know about IRS notices in case one shows up in your mailbox.

1. Don’t panic. Many of these letters require a simple response.

2. There are many reasons why the IRS sends correspondence. If you receive an IRS notice, it will typically cover a very specific issue about your account or tax return. Notices may require payment, notify you of changes to your account or ask you to provide more information.

3. Each notice offers specific instructions on what you need to do to satisfy the inquiry.

4. If you receive a notice advising you that the IRS has corrected your tax return, you should review the correspondence and compare it with the information on your return.

5. If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.

6. If you do not agree with the correction the IRS made, it is important that you respond as requested. You should send a written explanation of why you disagree. Include any information and documents you want the IRS to consider with your response. Mail your reply with the bottom tear-off portion of the IRS letter to the address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.

7. You should be able to resolve most notices that you receive without calling or visiting an IRS office. If you do have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the notice with you when you call. This will help the IRS answer your inquiry.

8. Remember to keep copies of any notices you receive with your other income tax records.

9. The IRS sends notices and letters by mail. The agency never contacts taxpayers about their tax account or tax return by email.

Are you making a payment with your federal tax return this year? If so, here are 10 important things the IRS wants you to know about correctly paying your federal income taxes.

1. Never send cash.

2. If you file electronically, you can file and pay in a single step with an electronic funds withdrawal. If you e-file by yourself you can use your tax preparation software to make the withdrawal. If you use a tax preparer to e-file, you can ask the preparer to make your tax payment electronically.

3. Whether you file a paper return or e-file your return, you can pay by phone or online with a credit or debit card. The company that processes your payment will charge a processing fee.

4. If you file Schedule A, Itemized Deductions, you may be able to deduct the credit or debit card processing fee on next year’s return. This is a miscellaneous itemized deduction subject to the 2 percent limit.

5. Electronic payment options provide another way to pay taxes by check or money order. You can make payments 24 hours a day, seven days a week. Visit IRS.gov and click on the ‘Payments’ tab near the top left of the home page for more details.

6. If you pay by check or money order, make sure it is payable to the “United States Treasury.”

7. Be sure to write your name, address and daytime phone number on the front of your payment. Also, write the tax year, form number you are filing and the first Social Security number listed on your tax return.

8. Complete Form 1040-V, Payment Voucher, and include it with your tax return and payment when mailing it to the IRS. Double-check the IRS mailing address. This will help the IRS process your payment accurately and efficiently. Go to IRS.gov to download and print this form.

9. Remember to enclose your payment with your return but do not staple it to any tax form.

Adoption can create new families or expand existing ones. The expenses of adopting a child may also lower your federal tax. If you recently adopted or attempted to adopt a child, you may be eligible for a tax credit. You may also be eligible to exclude some of your income from tax. Here are ten things the IRS wants you to know about adoption tax benefits.

1. The maximum adoption tax credit and exclusion for 2012 is $12,650 per eligible child.

2. To be eligible, a child must generally be under 18 years old. There is an exception to this rule for children who are physically or mentally unable to care for themselves. 

3. For 2012, the tax credit is nonrefundable. This means that, while the credit may reduce your tax to zero, you cannot receive any additional amount in the form of a refund.

4. If your credit exceeds your tax, you may be able to carryforward the unused credit. This means that if you have an unused credit amount in 2012, you can use it to reduce your taxes for 2013. You can carryover an unused credit for up to five years or until you fully use the credit, whichever comes first.   

5. Use Form 8839, Qualified Adoption Expenses, to claim the adoption credit and exclusion. Although you cannot file your tax return with Form 8839 electronically, the IRS encourages you to use e-file software to prepare your return. E-file makes tax preparation easier and accurate. You can then print and mail your paper federal tax return to the IRS.

6. Adoption expenses must directly relate to the legal adoption of the child and they must be reasonable and necessary. Expenses that qualify include adoption fees, court costs, attorney fees and travel costs.

7. If you adopted an eligible U.S. child with special needs and the adoption is final, a special rule applies. You may be able to take the tax credit even if you did not pay any qualified adoption expenses. See the instructions for Form 8839 for more information about this rule.

8. If your employer has a written qualified adoption assistance program, you may be eligible to exclude some of your income from tax.

9. Depending on the adoption’s cost, you may be able to claim both the tax credit and the exclusion. However, you cannot claim both a credit and exclusion for the same expenses. This rule prevents you from claiming both tax benefits for the same expense.

The IRS has 10 important tips for you about setting aside money for your retirement in an Individual Retirement Arrangement.

1. You must be under age 70 1/2 at the end of the tax year in order to contribute to a traditional IRA.

2. You must have taxable compensation to contribute to an IRA. This includes income from wages, salaries, tips, commissions and bonuses. It also includes net income from self-employment. If you file a joint return, generally only one spouse needs to have taxable compensation.

3. You can contribute to your traditional IRA at any time during the year. You must make all contributions by the due date for filing your tax return. This due date does not include extensions. For most people this means you must contribute for 2012 by April 15, 2013. If you contribute between Jan. 1 and April 15, you should contact your IRA plan sponsor to make sure they apply it to the right year.

4. For 2012, the most you can contribute to your IRA is the smaller of either your taxable compensation for the year or $5,000. If you were 50 or older at the end of 2012 the maximum amount increases to $6,000.

5. Generally, you will not pay income tax on the funds in your traditional IRA until you begin taking distributions from it.

6. You may be able to deduct some or all of your contributions to your traditional IRA.

7. Use the worksheets in the instructions for either Form 1040A or Form 1040 to figure the amount of your contributions that you can deduct.

8. You may also qualify for the Savers Credit, formally known as the Retirement Savings Contributions Credit. The credit can reduce your taxes up to $1,000 (up to $2,000 if filing jointly). Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the Saver’s Credit.

9. You must file either Form 1040A or Form 1040 to deduct your IRA contribution or to claim the Saver’s Credit.

If you find you owe tax after completing your federal tax return but can't pay it all when you file, the IRS wants you to know your options.

Here are four tips that can help you lower the amount of interest and penalties when you don’t pay the full amount on time.

1. File on time and pay as much as you can. Filing on time ensures that you will avoid the late filing penalty. Paying as much as you can reduces the late payment penalty and interest charges. For electronic payment options, see IRS.gov. If you pay by check, make it payable to the United States Treasury and include it with your return.

2. Consider getting a loan or paying by credit card. The interest and fees charged by a bank or credit card company may be lower than IRS interest and penalties. For credit card options, see IRS.gov.

3. Request a payment agreement.  You do not need to wait for IRS to send you a bill before requesting a payment plan. You can:

•  
• Use the Online Payment Agreement tool at IRS.gov, or
• Complete and submit Form 9465, Installment Agreement  

Request, with your tax return. Find out about payment agreement user fees at IRS.gov or on Form 9465.

4. Don’t ignore a tax bill.  If you get a bill from the IRS, contact them right away to talk about payment options. The IRS may take collection action if you ignore the bill, which will only make things worse.

The April 15 tax-filing deadline is fast approaching. Some taxpayers may find that they need more time to file their tax returns. If you need extra time, you can get an automatic six-month extension from the IRS.

Here are five important things you need to know about filing an extension:

1. Extra time to file is not extra time to pay.  You may request an extension of time to file your federal tax return to get an extra six months to file, until Oct. 15. Although an extension will give you an extra six months to get your tax return to the IRS, it does not extend the time you have to pay any tax you owe. You will owe interest on any amount not paid by the April 15 deadline. You may also owe a penalty for failing to pay on time.

2. File on time even if you can’t pay.  If you complete your return but you can’t pay the full amount due, do not request an extension. File your return on time and pay as much as you can. You should pay the balance as soon as possible to minimize penalty and interest charges. If you need more time to pay, you can apply for a payment plan using the Online Payment Agreement tool on IRS.gov. You can also send Form 9465, Installment Agreement Request, with your return. If you are unable to make payments because of a financial hardship, the IRS will work with you. Call the IRS at 800-829-1040 to discuss your options.

3. Use Form 4868 if you file a paper form.  You can request an extension of time to file by submitting Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. You must submit this form to the IRS by April 15. Form 4868 is available on IRS.gov.

Some taxpayers may need to make estimated tax payments during the year. The type of income you receive determines whether you must pay estimated taxes. Here are six tips from the IRS about making estimated tax payments.

1. If you do not have taxes withheld from your income, you may need to make estimated tax payments. This may apply if you have income such as self-employment, interest, dividends or capital gains. It could also apply if you do not have enough taxes withheld from your wages. If you are required to pay estimated taxes during the year, you should make these payments to avoid a penalty.

2. Generally, you may need to pay estimated taxes in 2013 if you expect to owe $1,000 or more in taxes when you file your federal tax return. Other rules apply, and special rules apply to farmers and fishermen.

3. When figuring the amount of your estimated taxes, you should estimate the amount of income you expect to receive for the year. You should also include any tax deductions and credits that you will be eligible to claim. Be aware that life changes, such as a change in marital status or a child born during the year can affect your taxes. Try to make your estimates as accurate as possible.

4. You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 17 and Sept. 16 in 2013, and Jan. 15, 2014.

You’re not the only one waiting for your tax refund. Scammers are looking for it too. In fact, every year there are more and more scams designed to steal tax refunds.

When you are self-employed, it typically means you work for yourself, as an independent contractor, or own your own business. Here are six key points the IRS would like you to know about self-employment and self-employment taxes:

1. Self-employment income can include pay that you receive for part-time work you do out of your home. This could include income you earn in addition to your regular job.

2. Self-employed individuals file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040.

3. If you are self-employed, you generally have to pay self-employment tax as well as income tax. Self-employment tax includes Social Security and Medicare taxes. You figure this tax using Schedule SE, Self-Employment Tax.

4. If you are self-employed you may have to make estimated tax payments. People typically make estimated tax payments to pay taxes on income that is not subject to withholding. If you do not make estimated tax payments, you may have to pay a penalty when you file your income tax return. The underpayment of estimated tax penalty applies if you do not pay enough taxes during the year.

5. When you file your tax return, you can deduct some business expenses for the costs you paid to run your trade or business. You can deduct most business expenses in full, but some costs must be ’capitalized.’ This means you can deduct a portion of the expense each year over a period of years.

6. You may deduct only the costs that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.

If you made your home more energy efficient last year, you may qualify for a tax credit on your 2012 federal income tax return. Here is some basic information about home energy credits that you should know.

Non-Business Energy Property Credit 

• You may claim a credit of 10 percent of the cost of certain energy saving property that you added to your main home. This includes the cost of qualified insulation, windows, doors and roofs. 
• In some cases, you may be able to claim the actual cost of certain qualified energy-efficient property. Each type of property has a different dollar limit. Examples include the cost of qualified water heaters and qualified heating and air conditioning systems.
• This credit has a maximum lifetime limit of $500. You may only use $200 of this limit for windows.
• Your main home must be located in the U.S. to qualify for the credit.
• Not all energy-efficient improvements qualify, so be sure you have the manufacturer’s credit certification statement. It is usually available on the manufacturer’s website or with the product’s packaging.
• The credit was to expire at the end of 2011. A recent law extended it for two years through the end of 2013.

Residential Energy Efficient Property Credit

• This tax credit is 30 percent of the cost of alternative energy equipment that you installed on or in your home.
• Qualified equipment includes solar hot water heaters, solar electric equipment and wind turbines.
• There is no limit on the amount of credit available for most types of property. If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year’s tax return.
• You must install qualifying equipment in connection with your home located in the United States. It does not have to be your main home.
• The credit is available through 2016.

WASHINGTON — The Internal Revenue Service today reminded parents and students that now is a good time to see if they qualify for either of two college education tax credits or any of several other education-related tax benefits.

In general, the American opportunity tax credit, lifetime learning credit and tuition and fees deduction are available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the primary taxpayer, the taxpayer’s spouse or a dependent of the taxpayer.

Though a taxpayer often qualifies for more than one of these benefits, he or she can only claim one of them for a particular student in a particular year. The benefits are available to all taxpayers — both those who itemize their deductions on Schedule A and those who claim a standard deduction. The credits are claimed on Form 8863 and the tuition and fees deduction is claimed on Form 8917.

The American Taxpayer Relief Act, enacted Jan. 2, 2013, extended the American opportunity tax credit for another five years until the end of 2017. The new law also retroactively extended the tuition and fees deduction, which had expired at the end of 2011, through 2013. The lifetime learning credit did not need to be extended because it was already a permanent part of the tax code.

For those eligible, including most undergraduate students, the American opportunity tax credit will yield the greatest tax savings. Alternatively, the lifetime learning credit should be considered by part-time students and those attending graduate school. For others, especially those who don’t qualify for either credit, the tuition and fees deduction may be the right choice.

All three benefits are available for students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. None of them can be claimed by anonresident alien or married person filing a separate return. In most cases, dependents cannot claim these education benefits.

Normally, a student will receive a Form 1098-T from their institution by the end of January of the following year. This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax benefits. Taxpayers should see the instructions to Forms 8863 and 8917 and Publication 970 for details on properly figuring allowable tax benefits.

Many of those eligible for the American opportunity tax credit qualify for the maximum annual credit of $2,500 per student. Here are some key features of the credit:

• The credit targets the first four years of post-secondary education, and a student must be enrolled at least half time. This means that expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college do not qualify. Any student with a felony drug conviction also does not qualify.
  
  
• Tuition, required enrollment fees, books and other required course materials generally qualify. Other expenses, such as room and board, do not.
  
  
• The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  
  
• The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
  
  
• Forty percent of the American opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student. Other education-related credits and deductions do not provide a benefit to people who owe no tax.

The lifetime learning credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American opportunity tax credit, the limit on the lifetime learning credit applies to each tax return, rather than to each student. Though the half-time student requirement does not apply, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:

• Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
  
  
• The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
  
  
• Income limits are lower than under the American opportunity tax credit. For 2012, the full credit can be claimed by taxpayers whose MAGI is $52,000 or less. For married couples filing a joint return, the limit is $104,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $124,000 or more and singles, heads of household and some widows and widowers whose MAGI is $62,000 or more.

Like the lifetime learning credit, the tuition and fees deduction is available for all levels of post-secondary education, and the cost of one or more courses can qualify. The annual deduction limit is $4,000 for joint filers whose MAGI is $130,000 or less and other taxpayers whose MAGI is $65,000 or less. The deduction limit drops to $2,000 for couples whose MAGI exceeds $130,000 but is no more than $160,000, and other taxpayers whose MAGI exceeds $65,000 but is no more than $80,000.

Eligible parents and students can get the benefit of these provisions during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4, claiming additional withholding allowances, and giving it to their employer.

There are a variety of other education-related tax benefits that can help many taxpayers. They include:

• Scholarship and fellowship grants — generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
  
  
• Student loan interest deduction of up to $2,500 per year.
  
  
• Savings bonds used to pay for college — though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
  
  
• Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the earned income tax credit.

WASHINGTON — The Internal Revenue Service has expanded its Voluntary Classification Settlement Program (VCSP), paving the way for more taxpayers to take advantage of this low-cost option for achieving certainty under the law by reclassifying their workers as employees for future tax periods.

The IRS is modifying several eligibility requirements, thus making it possible for many more interested employers, especially larger ones, to apply for this program. Thus far, nearly 1,000 employers have applied for the VCSP, which provides partial relief from federal payroll taxes for eligible employers who are treating their workers or a class or group of workers as independent contractors or other nonemployees and now want to treat them as employees. Businesses, tax-exempt organizations and government entities may qualify.

Under the revamped program, employers under IRS audit, other than an employment tax audit, can qualify for the VCSP. Furthermore, employers accepted into the program will no longer be subject to a special six-year statute of limitations, rather than the usual three years that normally applies to payroll taxes. These and other permanent modifications to the program are described inAnnouncement 2012-45 and in questions and answers, posted on IRS.gov.

Normally, employers are barred from the VCSP if they failed to file required Forms 1099 with respect to workers they are seeking to reclassify for the past three years. However, for the next few months, until June 30, 2013, the IRS is waiving this eligibility requirement. Details on this temporary change are in Announcement 2012-46.

To be eligible for the VCSP, an employer must currently be treating the workers as nonemployees; consistently have treated the workers in the past as nonemployees, including having filed any required Forms 1099; and not currently be under audit on payroll tax issues by the IRS. In addition, the employer cannot currently be under audit by the Department of Labor or a state agency concerning the classification of these workers or contesting the classification of the workers in court.

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will generally pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Employers applying for the temporary relief program available for those who failed to file Forms 1099 will pay a slightly higher amount, plus some penalties, and will need to file any unfiled Forms 1099 for the workers they are seeking to reclassify.

Giving to charity may make you feel good and help you lower your tax bill. The IRS offers these nine tips to help ensure your contributions pay off on your tax return.

1. If you want a tax deduction, you must donate to a qualified charitable organization. You cannot deduct contributions you make to either an individual, a political organization or a political candidate

2. You must file Form 1040 and itemize your deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must also file Form 8283, Noncash Charitable Contributions, with your tax return.

3. If you receive a benefit of some kind in return for your contribution, you can only deduct the amount that exceeds the fair market value of the benefit you received. Examples of benefits you may receive in return for your contribution include merchandise, tickets to an event or other goods and services.

4. Donations of stock or other non-cash property are usually valued at fair market value. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.

5. Fair market value is generally the price at which someone can sell the property.

6. You must have a written record about your donation in order to deduct any cash gift, regardless of the amount. Cash contributions include those made by check or other monetary methods. That written record can be a written statement from the organization, a bank record or a payroll deduction record that substantiates your donation. That documentation should include the name of the organization, the date and amount of the contribution. A telephone bill meets this requirement for text donations if it shows this same information.

7. To claim a deduction for gifts of cash or property worth $250 or more, you must have a written statement from the qualified organization. The statement must show the amount of the cash or a description of any property given. It must also state whether the organization provided any goods or services in exchange for the gift.

8. You may use the same document to meet the requirement for a written statement for cash gifts and the requirement for a written acknowledgement for contributions of $250 or more.

While each individual tax return is unique, there are some tax rules that affect every person who files a federal income tax return. These rules involve dependents and exemptions. The IRS has six important facts about dependents and exemptions that will help you file your 2012 tax return.

1. Exemptions reduce taxable income.  There are two types of exemptions: personal exemptions and exemptions for dependents. You can deduct $3,800 for each exemption you claim on your 2012 tax return.

2. Personal exemptions.  You usually may claim one exemption for yourself on your tax return. You also can claim one for your spouse if you are married and file a joint return. If you and your spouse file separate returns, you may claim the exemption for your spouse only if he or she had no gross income, is not filing a joint return and was not the dependent of another taxpayer.

3. Exemptions for dependents.  Generally, you can claim an exemption for each of your dependents. A dependent is either your qualifying child or qualifying relative. If you are married, you may not claim your spouse as your dependent. You must list the Social Security Number of each dependent you claim on your return. See Publication 501, Exemptions, Standard Deduction, and Filing Information, for information about dependents who do not have Social Security numbers.

4. Some people do not qualify as dependents.  While there are some exceptions, you generally may not claim a married person as a dependent if they file a joint return with their spouse.

5. Dependents may have to file.  If you can claim someone else as your dependent on your tax return, that person may still be required to file his or her own tax return. Whether they must file a return depends on several factors, including the amount of their gross income (both earned and unearned income), their marital status and any special taxes they owe.

6. Dependents can’t claim a personal exemption.  If you can claim another person as a dependent on your tax return, that person may not claim a personal exemption on his or her own tax return. This is true even if you do not actually claim that person as your dependent on your tax return. The fact that you could claim that person disqualifies them from claiming a personal exemption.

Remember that a person must meet several tests in order for you to claim them as your dependent. See Publication 501 for the tests you will use to determine if you can claim a person as your dependent.

Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn’t miss when filing taxes this year.

1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012.   For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.

2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

4. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.

5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See IRS Publication 970, Tax Benefits for Education.

7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.

8. Self-employed health insurance deduction - If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act. 

Direct deposit is the fast, easy and safe way to receive your tax refund. Whether you file electronically or on paper, direct deposit gives you access to your refund faster than a paper check.

Here are four reasons more than 80 million taxpayers chose direct deposit in 2012:

1. Security.  Every year the U.S. Postal Service returns thousands of paper checks to the IRS as undeliverable. Direct deposit eliminates the possibility of a lost, stolen or undeliverable refund check.

2. Convenience.  With direct deposit, the money goes directly into your bank account. You will not have to make a special trip to the bank to deposit the money yourself.

3. Ease.  It’s easy to choose direct deposit. When you are preparing your tax return, simply follow the instructions on the tax return or in the tax software. Make sure you enter the correct bank account and bank routing transit numbers.

4. Options.  You can deposit your refund into more than one account. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts and up to three different U.S. financial institutions. Use IRS Form 8888, Allocation of Refund (Including Savings Bond Purchases), to divide your refund. If you are designating part of your refund to pay your tax preparer, you should not use Form 8888. You should only deposit your refund directly into accounts that are in your own name, your spouse’s name or both if it’s a joint account.

Some banks require both spouses’ names on the account to deposit a tax refund from a joint return. Check with your bank for their direct deposit requirements.

The IRS receives thousands of reports every year from taxpayers who receive emails out-of-the-blue claiming to be from the IRS. Scammers use the IRS name or logo to make the message appear authentic so you will respond to it. In reality, it’s a scam known as “phishing,” attempting to trick you into revealing your personal and financial information. The criminals then use this information to commit identity theft or steal your money.

The IRS has this advice for anyone who receives an email claiming to be from 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; and
• Do not click on any links in a suspicious email or phishing website and do not enter confidential information. Visit the IRS website and click on 'Identity Theft' at the bottom of the page for more information.

Here are five other key points the IRS wants you to know about phishing scams.

1. The IRS does not initiate contact with taxpayers by email or social media channels to request personal or financial information;

2. The IRS never asks for detailed personal and financial information like PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts;

3. The address of the official IRS website is www.irs.gov. Do not be misled by sites claiming to be the IRS but ending in .com, .net, .org or anything other than .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 their 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. Forward a suspicious email to phishing@irs.gov;

5. You can help the IRS and other law enforcement agencies shut down these schemes. Visit the IRS.gov website to get details on how to report scams and helpful resources if you are the victim of a scam. Click on "Reporting Phishing" at the bottom of the page.

Some people must pay taxes on their Social Security benefits. If you get Social Security, you should receive a Form SSA-1099, Social Security Benefit Statement, by early February. The form shows the amount of benefits you received in 2012.

Here are five tips from the IRS to help you determine if your benefits are taxable:

1. The amount of your income and your filing status affect whether you must pay taxes on your Social Security.

2. If Social Security was your only income in 2012, your benefits are probably not taxable. You also may not need to file a federal income tax return.

3. If you received income from other sources, then you may have to pay taxes on your benefits.

4. You can follow these two quick steps to see if your benefits are taxable:

• Add one-half of the Social Security benefits you received to all your other income, including tax-exempt interest. Tax-exempt interest includes interest from state and municipal bonds.

• Next, compare this total to the ‘base amount’ for your filing status. If the total is more than your base amount, then some of your benefits may be taxable.

The three 2012 base amounts are:

$25,000 for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year;

$32,000 for married couples filing jointly; and

$0 for married persons filing separately who lived together at any time during the year.

If you paid for medical or dental expenses in 2012, you may be able to get a tax deduction for costs not covered by insurance. The IRS wants you to know these seven facts about claiming the medical and dental expense deduction.

1. You must itemize.  You can only claim medical and dental expenses for costs not covered by insurance if you itemize deductions on your tax return. You cannot claim medical and dental expenses if you take the standard deduction.

2. Deduction is limited.  You can deduct medical and dental expenses that are more than 7.5 percent of your adjusted gross income.

3. Expenses paid in 2012.  You can include medical and dental costs that you paid in 2012, even if you received the services in a previous year. Keep good records to show the amount that you paid.

4. Qualifying expenses.  You may include most medical or dental costs that you paid for yourself, your spouse and your dependents. Some exceptions and special rules apply. Visit IRS.gov for more details.

5. Costs to include.  You can normally claim the costs of diagnosing, treating, easing or preventing disease. The costs of prescription drugs and insulin qualify. The cost of medical, dental and some long-term care insurance also qualify.

6. Travel is included.  You may be able to claim the cost of travel to obtain medical care. That includes the cost of public transportation or an ambulance as well as tolls and parking fees. If you use your car for medical travel, you can deduct the actual costs, including gas and oil. Instead of deducting the actual costs, you can deduct the standard mileage rate for medical travel, which is 23 cents per mile for 2012.

7. No double benefit.  Funds from Health Savings Accounts or Flexible Spending Arrangements used to pay for medical or dental costs are usually tax-free. Therefore, you cannot deduct expenses paid with funds from those plans.

If you haven’t filed your 2009 federal tax return, you may still have time to claim your tax refund. The IRS has $917 million in unclaimed refunds from an estimated 984,000 tax returns that people didn’t file for the 2009 tax year. The IRS estimates that half the potential refunds for 2009 are more than $500.

Here are some things the IRS wants you to know about unclaimed refunds:

1. Not required to file.  You may not have filed a 2009 tax return because you didn’t earn enough income to have a filing requirement. If you had taxes withheld from your wages or made quarterly estimated payments, you can still file a return and claim your refund.

2. Three-year window.  You have three years to claim a refund. If you don’t claim your refund within three years, the money becomes property of the U.S. Treasury. For 2009 returns, the window closes on April 15, 2013. You must properly address, postmark and mail your return by that date. There is no penalty for filing a late return if you are due a refund.

3. Don’t miss the EITC.  By not filing a return, you may miss an important credit — the Earned Income Tax Credit. For 2009, the credit is worth as much as $5,657. The EITC can put extra money in the pockets of individuals and families with low and moderate incomes. If you are eligible for the EITC, you must file a federal income tax return to claim the credit. This is true even if you are not otherwise required to file.

4. Some refunds applied.  The IRS may hold your refund if you have not filed tax returns for 2010 and 2011. The law allows the use of your federal tax refund to pay any amounts still owed to the IRS or your state tax agency. If you have unpaid debts, such as overdue child support or student loans, your refund may be applied to pay that debt.

The American Opportunity Credit and the Lifetime Learning Credit may help you pay for the costs of higher education. If you pay tuition and fees for yourself, your spouse or your dependent you may qualify for these credits.

Here are some facts the IRS wants you to know about these important credits:

The American Opportunity Credit

• The AOTC is worth up to $2,500 per eligible student.
• The credit is available for the first four years of higher education at an eligible college, university or vocational school.
• The credit lowers your taxes and is partially refundable. This means you could get a refund of up to $1,000 even if you owe zero tax.
• An eligible student must be working toward a degree, certificate or other recognized credential.
• The student must be enrolled at least half time for at least one academic period that began during the year.
• You generally can claim the costs of tuition and required fees, books and other required course materials. Other expenses, such as room and board, do not qualify.

The Lifetime Learning Credit

• The credit is worth up to $2,000 per tax return per year. The yearly limit applies no matter how many students are eligible for the credit.
• The credit is nonrefundable. This means the amount you can claim is limited to the amount of tax you owe.
• The credit is available for all years of higher education. This includes courses taken to acquire or improve job skills.
• You can claim the costs of tuition and fees required for enrollment or attendance. This includes amounts you were required to pay to the institution for course-related books, supplies and equipment.

You cannot claim either of these credits if someone else claims you as a dependent on his or her tax return. Both credits are subject to income limitations and may be reduced or eliminated depending on your income.

Keep in mind that you can’t claim both credits for the same student in the same year. You may not claim both credits for the same expense. Parents or students claiming either credit should receive a Form 1098-T, Tuition Statement, from their educational institution. You should make sure it is complete and correct.

If you are self-employed, the IRS wants you to know about a tax deduction generally available to people who are self-employed.

The deduction is for medical, dental or long-term care insurance premiums that self-employed people often pay for themselves, their spouse and their dependents. The insurance can also cover your child who was under age 27 at the end of 2012, even if the child was not your dependent.

You may be able to take this deduction if one of the following applies to you:

• You had a net profit from self-employment. You would report this on a Schedule C, Profit or Loss From Business, Schedule C-EZ, Net Profit From Business, or Schedule F, Profit or Loss From Farming.
• You had self-employment earnings as a partner reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc.
• You used an optional method to figure your net earnings from self-employment on Schedule SE, Self-Employment Tax.
• You were paid wages reported on Form W-2, Wage and Tax Statement, as a shareholder who owns more than two percent of the outstanding stock of an S corporation.
• There are also some rules that apply to how the insurance plan is established. Follow these guidelines to make sure the plan qualifies:
• If you’re self-employed and file Schedule C, C-EZ, or F, the policy can be in your name or in your business’ name.
• If you’re a partner, the policy can be in your name or the partnership’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the partnership must reimburse you and include the premiums as income on your Schedule K-1.
• If you’re an S corporation shareholder, the policy can be in your name or the S corporation’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the S corporation must reimburse you and include the premiums as wage income on your Form W-2.

The IRS’s annual ‘Dirty Dozen’ list includes common tax scams that often peak during the tax filing season. The IRS recommends that taxpayers be aware so they can protect themselves against claims that sound too good to be true. Taxpayers who buy into illegal tax scams can end up facing significant penalties and interest and even criminal prosecution. 

The IRS reminds U.S. citizens and residents who lived or worked abroad in 2012 that they may need to file a federal income tax return. If you are living or working outside the United States, you generally must file and pay your tax in the same way as people living in the U.S. This includes people with dual citizenship.

Here are seven tips taxpayers with foreign income should know:

1. Report Worldwide Income. The law requires U.S. citizens and resident aliens to report any worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.

2. File Required Tax Forms. In most cases, affected taxpayers need to file Schedule B, Interest and Ordinary Dividends, with their tax returns. Some taxpayers may need to file additional forms. For example, some may need to file Form 8938, Statement of Specified Foreign Financial Assets, while others may need to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, with the Treasury Department. See Publication 4261, Do You Have a Foreign Financial Account?, for more information.

3. Consider the Automatic Extension. U.S. citizens and resident aliens living abroad on April 15, 2013, may qualify for an automatic two-month extension to file their 2012 federal income tax returns. The extension of time to file until June 17, 2013, also applies to those serving in the military outside the U.S. Taxpayers must attach a statement to their returns explaining why they qualify for the extension.

4. Review the Foreign Earned Income Exclusion. Many Americans who live and work abroad qualify for the foreign earned income exclusion. This means taxpayers who qualify will not pay taxes on up to $95,100 of their wages and other foreign earned income they received in 2012. See Forms 2555, Foreign Earned Income, or 2555-EZ, Foreign Earned Income Exclusion, for more information.

5. Don’t Overlook Credits and Deductions. Taxpayers may be able to take either a credit or a deduction for income taxes paid to a foreign country. This benefit reduces the taxes these taxpayers pay in situations where both the U.S. and another country tax the same income.

If you earn money managing or working on a farm, you are in the farming business. Farms include plantations, ranches, ranges and orchards. Farmers may raise livestock, poultry or fish, or grow fruits or vegetables. Here are 10 things about farm income and expenses that the IRS wants you to know.

1. Crop insurance proceeds.  Insurance payments from crop damage count as income. They should generally be reported the year they are received.

2. Deductible farm expenses.  Farmers can deduct ordinary and necessary expenses as business expenses. An ordinary farming expense is one that is common and accepted in the farming business. A necessary expense is one that is appropriate for that business.

3. Employees and hired help.  You can deduct reasonable wages you paid to your farm’s full and part-time workers. You must withhold Social Security, Medicare and income taxes from your employees’ wages.

4. Items purchased for resale.  If you purchased livestock and other items for resale, you may be able to deduct their cost in the year of the sale. This includes freight charges for transporting livestock to your farm.

5. Repayment of loans. You can only deduct the interest you paid on a loan if the loan proceeds are used for your farming business. You cannot deduct interest on a loan used for personal expenses.

6. Weather-related sales.  Bad weather may force you to sell more livestock or poultry than you normally would. If so, you may be able to postpone reporting a gain from the sale of the additional animals.

7. Net operating losses.  If deductible expenses are more than income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.

8. Farm income averaging.  You may be able to average some or all of the current year's farm income by spreading it out over the past three years. This may lower your taxes if your farm income is high in the current year and low in one or more of the past three years. This method does not change your prior year tax. It only uses the prior year information to figure your current year tax.

9. Fuel and road use.  You may be able to claim a tax credit or refund of federal excise taxes on fuel used on your farm for farm work.

Some children receive investment income and are required to file a federal tax return. If a child cannot file his or her own tax return for any reason, such as age, the child's parent or guardian is responsible for filing a return on the child’s behalf.

There are special tax rules that affect how parents report a child’s investment income. Some parents can include their child’s investment income on their tax return. Other children may have to file their own tax return.

Here are four facts from the IRS about the taxability of your child’s investment income.

1. Investment income normally includes interest, dividends, capital gains and other unearned income, such as from a trust.

2. Special rules apply if your child's total investment income is more than $1,900. The parent’s tax rate may apply to part of that income instead of the child's tax rate.

3. If your child's total interest and dividend income is less than $9,500, you may be able to include the income on your tax return. See Form 8814, Parents' Election to Report Child's Interest and Dividends. If you make this choice, the child does not file a return.

4. Your child must file their own tax return if they received investment income of $9,500 or more. File Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, with the child’s federal tax return.

When you file a tax return, you usually have a choice to make: whether to itemize deductions or take the standard deduction. You should compare both methods and use the one that gives you the greater tax benefit.

The IRS offers these six facts to help you choose.

1. Figure your itemized deductions.  Add up the cost of items you paid for during the year that you might be able to deduct. Expenses could include home mortgage interest, state income taxes or sales taxes (but not both), real estate and personal property taxes, and gifts to charities. They may also include large casualty or theft losses or large medical and dental expenses that insurance did not cover. Unreimbursed employee business expenses may also be deductible.

2. Know your standard deduction.  If you do not itemize, your basic standard deduction amount depends on your filing status. For 2012, the basic amounts are:

• Single = $5,950
• Married Filing Jointly  = $11,900
• Head of Household = $8,700
• Married Filing Separately = $5,950
• Qualifying Widow(er) = $11,900

3. Apply other rules in some cases. Your standard deduction is higher if you are 65 or older or blind. Other rules apply if someone else can claim you as a dependent on his or her tax return. To figure your standard deduction in these cases, use the worksheet in the instructions for Form 1040, U.S. Individual Income Tax Return.

4. Check for the exceptions.  Some people do not qualify for the standard deduction and should itemize. This includes married people who file a separate return and their spouse itemizes deductions. See the Form 1040 instructions for the rules about who may not claim a standard deduction.

5. Choose the best method.  Compare your itemized and standard deduction amounts. You should file using the method with the larger amount.

6. File the right forms.  To itemize your deductions, use Form 1040, and Schedule A, Itemized Deductions. You can take the standard deduction on  Forms 1040, 1040A or 1040EZ.

If you use part of your home for your business, you may qualify to deduct expenses for the business use of your home. Here are six facts from the IRS to help you determine if you qualify for the home office deduction.

1. Generally, in order to claim a deduction for a home office, you must use a part of your home exclusively and regularly for business purposes. In addition, the part of your home that you use for business purposes must also be:

• your principal place of business, or

• a place where you meet with patients, clients or customers in the normal course of your business, or

• a separate structure not attached to your home. Examples might include a studio, workshop, garage or barn. In this case, the structure does not have to be your principal place of business or a place where you meet patients, clients or customers.

2. You do not have to meet the exclusive use test if you use part of your home to store inventory or product samples. The exclusive use test also does not apply if you use part of your home as a daycare facility.

3. The home office deduction may include part of certain costs that you paid for having a home. For example, a part of the rent or allowable mortgage interest, real estate taxes and utilities could qualify. The amount you can deduct usually depends on the percentage of the home used for business.

4. The deduction for some expenses is limited if your gross income from the business use of your home is less than your total business expenses.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. Report your deduction on Schedule C, Profit or Loss From Business.

Taking money out early from your retirement plan can cost you an extra 10 percent in taxes. Here are five things you should know about early withdrawals from retirement plans.

1. An early withdrawal normally means taking money from your plan, such as a 401(k), before you reach age 59½.

2. You must report the amount you withdrew from your retirement plan to the IRS. You may have to pay an additional 10 percent tax on your withdrawal.

3. The additional 10 percent tax normally does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost in participating in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.

4. If you transfer a withdrawal from one qualified retirement plan to another within 60 days, the transfer is a rollover. Rollovers are not subject to income tax. The added 10 percent tax also does not apply to a rollover.

5. There are several other exceptions to the additional 10 percent tax. These include withdrawals if you have certain medical expenses or if you are disabled. Some of the exceptions for retirement plans are different from the rules for IRAs.

If you received unemployment benefits this year, you must report the payments on your federal income tax return.

Here are four tips from the IRS about unemployment benefits.

1. You must include all unemployment compensation you received in your total income for the year. You should receive a Form 1099-G, Certain Government Payments. It will show the amount you were paid and the amount of any federal income taxes withheld from your payments.

2. Types of unemployment benefits include:

• Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
• Railroad unemployment compensation benefits
• Disability payments from a government program paid as a substitute for unemployment compensation
• Trade readjustment allowances under the Trade Act of 1974
• Unemployment assistance under the Disaster Relief and Emergency Assistance Act

3. You must include benefits from regular union dues paid to you as an unemployed member of a union in your income. However, other rules apply if you contribute to a special union fund and your contributions are not deductible. If this applies to you, only include in income the amount you received from the fund that is more than your contributions.

4. You can choose to have federal income tax withheld from your unemployment benefits. You make this choice using Form W-4V, Voluntary Withholding Request. If you complete the form and give it to the paying office, they will withhold tax at 10 percent of your payments. If you choose not to have tax withheld, you may have to make estimated tax payments throughout the year.

The Child and Dependent Care Credit can help offset some of the costs you pay for the care of your child, a dependent or a spouse. Here are 10 facts the IRS wants you to know about the tax credit for child and dependent care expenses.

1. If you paid someone to care for your child, dependent or spouse last year, you may qualify for the child and dependent care credit. You claim the credit when you file your federal income tax return.

2. You can claim the Child and Dependent Care Credit for “qualifying individuals.” A qualifying individual includes your child under age 13. It also includes your spouse or dependent who lived with you for more than half the year who was physically or mentally incapable of self-care.

3. The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.

4. You, and your spouse if you file jointly, must have earned income, such as income from a job. A special rule applies for a spouse who is a student or not able to care for himself or herself.

5. Payments for care cannot go to your spouse, the parent of your qualifying person or to someone you can claim as a dependent on your return. Payments can also not go to your child who is under age 19, even if the child is not your dependent.

6. This credit can be worth up to 35 percent of your qualifying costs for care, depending upon your income. When figuring the amount of your credit, you can claim up to $3,000 of your total costs if you have one qualifying individual. If you have two or more qualifying individuals you can claim up to $6,000 of your costs.

7. If your employer provides dependent care benefits, special rules apply. See Form 2441, Child and Dependent Care Expenses for how the rules apply to you.

8. You must include the Social Security number on your tax return for each qualifying individual.

9. You must also include on your tax return the name, address and Social Security number (individuals) or Employer Identification Number (businesses) of your care provider.

10. To claim the credit, attach Form 2441 to your tax return.

A tax credit reduces the amount of tax you must pay. A refundable tax credit not only reduces the federal tax you owe, but also could result in a refund.

Here are five credits the IRS wants you to consider before filing your 2012 federal income tax return:

1. The Earned Income Tax Credit is a refundable credit for people who work and don’t earn a lot of money. The maximum credit for 2012 returns is $5,891 for workers with three or more children. Eligibility is determined based on earnings, filing status and eligible children. Workers without children may be eligible for a smaller credit. If you worked and earned less than $50,270, use the EITC Assistant tool on IRS.gov to see if you qualify. For more information, see Publication 596, Earned Income Credit.

2. The Child and Dependent Care Credit is for expenses you paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent. The care must enable you to work or look for work. For more information, see Publication 503, Child and Dependent Care Expenses.

3. The Child Tax Credit may apply to you if you have a qualifying child under age 17. The credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return. You may be required to file the new Schedule 8812, Child Tax Credit, with your tax return to claim the credit. See Publication 972, Child Tax Credit, for more information.

4. The Retirement Savings Contributions Credit (Saver’s Credit) helps low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or a retirement plan at work. The credit is in addition to any other tax savings that apply to retirement plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs).

5. The American Opportunity Tax Credit helps offset some of the costs that you pay for higher education. The AOTC applies to the first four years of post-secondary education. The maximum credit is $2,500 per eligible student. Forty percent of the credit, up to $1,000, is refundable. You must file Form 8863, Education Credits, to claim it if you qualify. For more information, see Publication 970, Tax Benefits for Education.

Many members of the military are able to get their tax returns prepared for free on or off most military bases including overseas locations. The U.S. Armed Forces participates in the Volunteer Income Tax Assistance program sponsored by the IRS. VITA provides free tax advice, tax preparation, tax return filing and other tax help to military members and their families.

Here are four things you need to know about free military tax assistance:

1. Armed Forces Tax Council.  The Armed Forces Tax Council oversees the military tax programs offered worldwide. AFTC partners with the IRS to conduct outreach to military personnel and their families. This includes the Army, Air Force, Navy, Marine Corps and Coast Guard.

2. Volunteer tax sites.  Military-based VITA sites staffed with IRS-trained volunteers provide free tax help and tax return preparation. Volunteers receive training on military tax issues, such as combat zone tax benefits, filing extensions and special benefits that apply to the Earned Income Tax Credit.

3. What to bring.  To receive free tax assistance, bring the following records to your military VITA site:

• Valid photo identification
• Social Security cards for you, your spouse and dependents, or a Social Security number verification letter issued by the Social Security Administration
• Birth dates for you, your spouse and dependents
• Wage and earning statement(s), such as Forms W-2, W-2G, and 1099-R
• Interest and dividend statements (Forms 1099)
• A copy of last year’s federal and state tax returns, if available
• Checkbook for routing and account numbers for direct deposit of your tax refund
• Total amount paid for day care and day care provider’s identifying number. This is usually an Employer Identification Number or Social Security number.
• Other relevant information about income and expenses

4. Joint returns.  If you are married filing a joint return and wish to file electronically, both you and your spouse should be present to sign the required forms. If both cannot be present, you usually must bring a valid power of attorney form along with you. You may use IRS Form 2848, Power of Attorney and Declaration of Representative for this purpose.

There is a special exception to this rule if your spouse is in a combat zone. The exception allows a spouse to prepare and e-file a joint return with a written statement stating the other spouse is in a combat zone and unable to sign.

Small businesses sometimes barter to get products or services they need. Bartering is the trading of one product or service for another. Usually there is no exchange of cash. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services.

The IRS reminds all taxpayers that the fair market value of property or services received through a barter is taxable income. Both parties must report as income the value of the goods and services received in the exchange.

Here are four facts about bartering:

1. Barter exchanges.  A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually. The exchange must give a copy of the form to its members and file a copy with the IRS.

2. Bartering income.  Barter and trade dollars are the same as real dollars for tax reporting purposes. If you barter, you must report on your tax return the fair market value of the products or services you received.

3. Tax implications.  Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.

4. Reporting rules.  How you report bartering varies depending on which form of bartering takes place. Generally, if you are in a trade or business you report bartering income on Form 1040, Schedule C, Profit or Loss from Business. You may be able to deduct certain costs you incurred to perform the bartering.

If your lender cancelled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012.

Here are 10 key facts from the IRS about mortgage debt forgiveness:

1. Cancelled debt normally results in taxable income. However, you may be able to exclude the cancelled debt from your income if the debt was a mortgage on your main home.

2. To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage.

3. The maximum qualified debt that you can exclude under this exception is $2 million. The limit is $1 million for a married person who files a separate tax return.

4. You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt cancelled in a foreclosure.

5. You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing.

6. Proceeds of refinanced mortgage debt used for other purposes do not qualify for the exclusion. For example, debt used to pay off credit card debt does not qualify. 

7. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal income tax return.

8. Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about these provisions.

9. If your lender reduced or cancelled at least $600 of your mortgage debt, they normally send you a statement in January of the next year. Form 1099-C, Cancellation of Debt, shows the amount of cancelled debt and the fair market value of any foreclosed property.

Saving for your retirement can make you eligible for a tax credit worth up to $2,000. If you contribute to an employer-sponsored retirement plan, such as a 401(k) or to an IRA, you may be eligible for the Saver’s Credit.

Here are seven points the IRS would like you to know about the Saver’s Credit:

1. The Saver’s Credit is formally known as the Retirement Savings Contribution Credit. The credit can be worth up to $2,000 for married couples filing a joint return or $1,000 for single taxpayers.

2. Your filing status and the amount of your income affect whether you are eligible for the credit. You may be eligible for the credit on your 2012 tax return if your filing status and income are:

• Single, married filing separately or qualifying widow or widower, with income up to $28,750
• Head of Household with income up to $43,125
• Married Filing Jointly, with income up to $57,500

3. You must be at least 18 years of age to be eligible. You also cannot have been a full-time student in 2012 nor claimed as a dependent on someone else’s tax return.

4. You must contribute to a qualified retirement plan by the due date of your tax return in order to claim the credit. The due date for most people is April 15.

5. The Saver’s Credit reduces the tax you owe.

6. Use IRS Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit. Be sure to attach the form to your federal tax return. If you use IRS e-file the software will do this for you.

The term “capital asset” for tax purposes applies to almost everything you own and use for personal or investment purposes. A capital gain or loss occurs when you sell a capital asset.

Here are 10 facts from the IRS on capital gains and losses:

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Capital assets include your home, household furnishings, and stocks and bonds that you hold as investments.

2. A capital gain or loss is the difference between your basis of an asset and the amount you receive when you sell it. Your basis is usually what you paid for the asset.

3. You must include all capital gains in your income.

4. You may deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of personal-use property.

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

6. If your long-term gains exceed your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a 'net capital gain.’ 

7. The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other types of income. The maximum capital gains rate for most people in 2012 is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of their net capital gains. Rates of 25 or 28 percent can also apply to special types of net capital gains.

8. If your capital losses are greater than your capital gains, you can deduct the difference between the two on your tax return. The annual limit on this deduction is $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they occurred that year.

The IRS no longer mails reminder letters to taxpayers who have to repay the First-Time Homebuyer Credit. To help taxpayers who must repay the credit, the IRS website has a user-friendly look-up tool. Here are four reminders about repaying the credit and using the tool:

1. Who needs to repay the credit?  If you bought a home in 2008 and claimed the First-Time Homebuyer Credit, the credit is similar to a no-interest loan. You normally must repay the credit in 15 equal annual installments. You should have started to repay the credit with your 2010 tax return.

You are usually not required to pay back the credit for a main home you bought after 2008. However, you may have to repay the entire credit if you sold the home or stopped using it as your main home within 36 months from the date of purchase. This rule also applies to homes bought in 2008.

2. How to use the tool. You can find the First-Time Homebuyer Credit Lookup tool at IRS.gov under the ‘Tools’ menu. You will need your Social Security number, date of birth and complete address to use the tool. If you claimed the credit on a joint return, each spouse should use the tool to get their share of the account information. That’s because the law treats each spouse as having claimed half of the credit for repayment purposes.

3. What the tool does. The tool provides important account information to help you report the repayment on your tax return. It shows the original amount of the credit, annual repayment amounts, total amount paid and the remaining balance. You can print your account page to share with your tax preparer and to keep for your records.

4. How to repay the credit.  To repay the First-Time Homebuyer Credit, add the amount you have to repay to any other tax you owe on your federal tax return. This could result in additional tax owed or a reduced refund. You report the repayment on line 59b on Form 1040, U.S. Individual Income Tax Return. If you are repaying the credit because the home stopped being your main home, you must attach Form 5405, Repayment of the First-Time Homebuyer Credit, to your tax return.

If your pay from your job includes tips, the IRS has a few important reminders about tip income:

• Tips are taxable. Individuals must pay federal income tax on any tips they receive. The value of non-cash tips, such as tickets, passes or other items of value are also subject to income tax.
• Include all tips on your return.  You must include all tips that you receive during the year on your income tax return. This includes tips you received directly from customers, tips added to credit cards and your share of tips received under a tip-splitting agreement with other employees.
• Report tips to your employer.  If you receive $20 or more in cash tips in any one month, you must report your tips for that month to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes on the reported tips.
• Keep a daily log of tips.  You can use IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips.

If you were married or divorced and changed your name last year, be sure to notify the Social Security Administration before you file your taxes with the IRS. If the name on your tax return doesn’t match SSA records, the IRS will flag it as an error and that may delay your refund.

Here are five tips for a person whose name has changed. They also apply if your dependent’s name has changed.

1. If you have married and you’re using your new spouse’s last name or you’ve hyphenated your last name, notify the SSA. That way, the IRS computers can match your new name with your Social Security number.

2. If you were divorced and are now using your former last name, notify the SSA of your name change.

3. Letting the SSA know about a name change is easy. File Form SS-5, Application for a Social Security Card, at your local SSA office or by mail with proof of your legal name change.

4. You can get Form SS-5 on the SSA’s website at www.ssa.gov, by calling 800-772-1213 or at local SSA offices. Your new card will have the same number as your former card but will show your new name.

5. If you adopted your new spouse’s children and their names changed, you'll need to update their names with SSA too. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return. Form W-7A is available on the IRS.gov website or by calling 800-TAX-FORM (800-829-3676).

Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:

• Child support payments;
• Gifts, bequests and inheritances;
• Welfare benefits;
• Damage awards for physical injury or sickness;
• Cash rebates from a dealer or manufacturer for an item you buy
• Reimbursements for qualified adoption expenses.

Some income is not taxable except under certain conditions. Examples include:

• Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
• Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.

All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering - the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.

Save Money with the Child Tax Credit

If you have a child under age 17, the Child Tax Credit may save you money at tax-time. Here are some facts about the credit:

• Amount.  The non-refundable Child Tax Credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return.
• Qualifications.  For this credit, a qualifying child must pass seven tests:

1. Age test.  The child must have been under age 17 at the end of 2012.

2. Relationship test.  The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, or stepsister. A child may also be a descendant of any of these individuals, including your grandchild, niece or nephew. You would always treat an adopted child as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

3. Support test. The child must not have provided more than half of their own support for the year.

4. Dependent test. You must claim the child as a dependent on your federal tax return.

5. Joint return test.  The child cannot file a joint return for the year, unless the only reason they are filing is to claim a refund.

6. Citizenship test.  The child must be a U.S. citizen, U.S. national or U.S. resident alien.

7. Residence test. In most cases, the child must have lived with you for more than half of 2012.

• Limitations. The Child Tax Credit is subject to income limitations, and may be reduced or eliminated depending on your filing status and income.
• Additional Child Tax Credit. If you qualify and get less than the full Child Tax Credit, you could receive a refund even if you owe no tax with the refundable Additional Child Tax Credit.
• Schedule 8812.  If you qualify to claim the Child Tax Credit make sure to check whether you must complete and attach the new Schedule 8812, Child Tax Credit, with your return. If you qualify to claim the Additional Child Tax Credit, you must complete and attach Schedule 8812.

http://www.pbgc.gov/about/who-we-are/retirement-matters/post/2013/01/14/Does-PBGC-Owe-You-Almost-%241-Million.aspx

http://www.usa.gov/Citizen/Topics/Government-Unclaimed-Money.shtml

http://www.irs.gov/uac/Newsroom/Simplified-Option-for-Claiming-Home-Office-Deduction-Starting-This-Year

Congress-passed bill averts fiscal cliff tax consequences

In the early morning hours of Jan. 1, 2013, the Senate, by a vote of 89-8, passed H.R.8, the “American Taxpayer Relief Act” (the Act). Late on that same day—hours after the government had technically gone over the “fiscal cliff”—the House of Representatives, by a vote of 257 to 167, also passed the bill. The Act, which the President is expect to quickly sign into law, would prevent many of the tax hikes that were scheduled to go into effect this year and retain many favorable tax breaks that were scheduled to expire. However, it would also increase income taxes for some high-income individuals and slightly increase transfer tax rates. This article provides an overview of the Act's key provisions.

Highlights of the Act include the following:

Tax rates. For tax years beginning after 2012, the income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6% as would have occurred under the EGTRRA sunset), but with a 39.6% rate applying for income above a certain threshold (specifically, income in excess of the “applicable threshold” over the dollar amount at which the 35% bracket begins). The applicable threshold is $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013.

PEP limitations to apply to “high-earners.” For tax years beginning after 2012, the Personal Exemption Phaseout (PEP), which had previously been suspended, is reinstated with a starting threshold for those making $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Under the phaseout, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's AGI exceeds the applicable threshold. These dollar amounts are inflation-adjusted for tax years after 2013.

Pease limitations to apply to “high-earners.” For tax years beginning after 2012, the “Pease“ limitation on itemized deductions, which had previously been suspended, is reinstated with a starting threshold for those making $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3% of the amount by which the taxpayer's adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. These dollar amounts are inflation-adjusted for tax years after 2013.

Capital gain and dividend rates rise for higher-income taxpayers. For tax years beginning after 2012, the top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). When accounting for Code Sec. 1411's 3.8% surtax on investment-type income and gains for tax years beginning after 2012, the overall rate for higher-income taxpayers will be 23.8%. (Under the EGTRRA/JGTRRA sunset provisions, long-term capital gain was to be taxed at a maximum rate of 20%, with an 18% rate for assets held more than five years, and dividends paid to individuals were to be taxed at the same rates that apply to ordinary income.)

For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. (Under the EGTRRA/JGTRRA sunset provisions, long-term capital gain of lower-income taxpayers was to be taxed at a maximum rate of 10%, with an 8% rate for assets held more than five years, and dividends were to be subject to ordinary income rates.) Taxpayers who are subject to a 25%-or-greater rate on ordinary income, but whose income levels fall below the $400,000/$450,000 thresholds, will continue to be subject to a 15% rate on capital gains and dividends. The rate will be 18.8% for those subject to the surtax.

Transfer tax provisions kept intact with slight rate increase. The Act prevents steep increases in estate, gift and generation-skipping transfer (GST) tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the Act also permanently increases the top estate, gift and rate from 35% to 40%. The Act also continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse. All changes are effective for individuals dying and gifts made after 2012.

Permanent AMT relief. The Act provides permanent alternative minimum tax (AMT) relief. The AMT is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). The result is alternative minimum taxable income (AMTI), which is subject to an AMT rate of 26% or 28%.

Prior to the Act, the individual AMT exemption amounts for 2012 were to have been $33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for married persons filing separately. Retroactively effective for tax years beginning after 2011, the Act permanently increases these exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, it indexes these exemption amounts for inflation.

Prior to the Act, for 2012, nonrefundable personal credits—other than the adoption credit, the child credit, the savers' credit, the residential energy efficient property credit, the non-depreciable property portions of the alternative motor vehicle credit, the qualified plug-in electric vehicle credit, and the new qualified plug-in electric drive motor vehicle credit—were to be allowed only to the extent that the individual's regular income tax liability exceeded his tentative minimum tax, determined without regard to the minimum tax foreign tax credit. Retroactively effective for tax years beginning after 2011, the Act permanently allows an individual to offset his entire regular tax liability and AMT liability by the nonrefundable personal credits.

Recovery Act extenders. The Act extends for five years the following items that were originally enacted as part of the American Recovery and Investment Tax Act of 2009 and that were slated to expired at the end of 2012:

• the American Opportunity tax credit, which permits      eligible taxpayers to claim a credit equal to 100% of the first $2,000 of      qualified tuition and related expenses, and 25% of the next $2,000 of      qualified tuition and related expenses (for a maximum tax credit of $2,500      for the first four years of post-secondary education);
• eased rules for qualifying for the refundable child      credit; and
• various earned income tax credit (EITC) changes      relating to higher EITC amounts for eligible taxpayers with three or more      children, and increases in threshold phaseout amounts for singles,      surviving spouses, and heads of households.

Historical individual extenders. The Act extends the following items for the period indicated beyond their prior termination date as shown in the listing:

• the deduction for certain expenses of elementary and      secondary school teachers, which expired at the end of 2011 and which is      now revived for 2012 and continued through 2013;
• the exclusion for discharge of qualified principal      residence indebtedness, which applied for discharges before Jan. 1, 2013      and which is now continued to apply for discharges before Jan. 1, 2014;
• parity for the exclusions for employer-provided mass      transit and parking benefits, which applied before 2012 and which is now      revived for 2012 and continued through 2013;
• the treatment of mortgage insurance premiums as      qualified residence interest, which expired at the end of 2011 and which      is now revived for 2012 and continued through 2013;
• the option to deduct State and local general sales      taxes, which expired at the end of 2011 and which is now revived for 2012      and continued through 2013.
• the special rule for contributions of capital gain real      property made for conservation purposes, which expired at the end of 2011      and which is now revived for 2012 and continued through 2013;
• the above-the-line deduction for qualified tuition and      related expenses, which expired at the end of 2011 and which is now      revived for 2012 and continued through 2013; and
• tax-free distributions from individual retirement plans      for charitable purposes, which expired at the end of 2011 and which is now      revived for 2012 and continued through 2013. Because 2012 has already      passed, a special rule permits distributions taken in 2012 to be      transferred to charities for a limited period in 2013. Another special      rule permits certain distributions made in 2013 as being deemed made on      Dec. 31, 2012.

Depreciation provisions modified and extended. The following depreciation provisions are retroactively extended by the Act through 2014:

• 15-year straight line cost recovery for qualified      leasehold improvements, qualified restaurant buildings and improvements,      and qualified retail improvements;
• 7-year recovery period for motorsports entertainment      complexes;
• accelerated depreciation for business property on an      Indian reservation;
• increased expensing limitations and treatment of      certain real property as Code Sec. 179 property;
• special expensing rules for certain film and television      productions; and
• the election to expense mine safety equipment.

The Act also extends and modifies the bonus depreciation provisions with respect to property placed in service after Dec. 31, 2012, in tax years ending after that date.

Business tax breaks extended. The following business credits and special rules are also extended:

• The Code Sec. 41 research credit is modified and retroactively      extended for two years through 2013.
• The temporary minimum low-income tax credit rate for      nonfederally subsidized new buildings under Code Sec. 42(b)(2)(A) is      extended to apply to housing credit dollar amount allocations made before      Jan. 1, 2014.
• The housing allowance exclusion for determining area      median gross income for qualified residential rental project exempt      facility bonds is extended two years.
• The Code Sec. 45A Indian employment tax credit is      retroactively extended for two years through 2013.
• The Code Sec. 45D new markets tax credits is      retroactively extended for two years through 2013.
• The Code Sec. 45G railroad track maintenance credit is      retroactively extended for two years through 2013.
• The Code Sec. 45N mine rescue team training credit is      retroactively extended for two years through 2013.
• The Code Sec. 45P employer wage credit for employees      who are active duty members of the uniformed services is retroactively      extended for two years through 2013.
• The Code Sec. 51 work opportunity tax credit is      retroactively extended for two years through 2013.
• Code Sec. 54E qualified zone academy bonds are      retroactively extended for two years through 2013.
• The enhanced charitable deduction for contributions of      food inventory under Code Sec. 174(e) is retroactively extended for two      years through 2013.
• Allowance of the domestic production activities      deduction for activities in Puerto Rico, for the first eight tax years of      the taxpayer beginning after Dec. 31, 2005, and before Jan. 1, 2014.
• Exclusion from a tax-exempt organization's unrelated      business taxable income (UBTI) of interest, rent, royalties, and annuities      paid to it from a controlled entity under Code Sec. 512(b)(13)(E)(iv) is      extended through Dec. 31, 2013.
• Treatment of certain dividends of regulated investment      companies (RICs) as “interest-related dividends” is extended through Dec.      31, 2013.
• Inclusion of RICs in the definition of a “qualified      investment entity” under Code Sec. 897(h)(4) is extended through Dec. 31,      2013.
• The exception under subpart F for active financing      income (i.e., certain income from the active conduct of a banking,      financing, insurance, or similar business) under Code Sec. 953(e)(10) and      Code Sec. 954(h)(9) for tax years of a foreign corporation beginning after      Dec. 31, '98, and before Jan. 1, 2014, for tax years of foreign      corporations beginning after Dec. 31, 2005, and before Jan. 1, 2014.
• Look-through treatment for payments between related      controlled foreign corporations (CFCs) under the foreign personal holding      company rules under Code Sec. 954(c)(6) is extended through Jan. 1, 2014.
• Exclusion of 100% of gain on certain small business      stock acquired before Jan. 1, 2014.
• Basis adjustment to stock of S corporations making      charitable contributions of property under Code Sec. 1367(a) in tax years      beginning before Dec. 31, 2013.
• The reduction in S corporation recognition period for      built-in gains tax under Code Sec. 1374(d)(7) is extended through 2013,      with a 10-year period instead of a 5-year period.
• Various empowerment zone tax incentives, including the      designation of an empowerment zone and of additional empowerment zones      under Code Sec. 1391(d) (extended through Dec. 31, 2013) and the period      for which the percentage exclusion for qualified small business stock (of      a corporation which is a qualified business entity) is 60%Code Sec.      1202(a)(2) (extended through Dec. 31, 2018).
• Tax-exempt financing for New York Liberty Zone under      Code Sec. 1400L(d)(2) is extended for bonds issued before Jan. 1, 2014.
• Temporary increase in limit on cover over run excise      taxes to Puerto Rico and the Virgin Islands is extended for spirits      brought into the U.S. before Jan. 1, 2014.
• American Samoa economic development credit, as      modified, is extended through Jan. 1, 2014.

Energy-related tax breaks extended. Various energy credits are extended. These include:

• The nonbusiness energy property credit under Code Sec.      25C for energy-efficient existing homes is retroactively extended for two      years through 2013. A taxpayer can claim a 10% credit on the cost of: (1)      qualified energy efficiency improvements, and (2) residential energy      property expenditures, with a lifetime credit limit of $500 ($200 for      windows and skylights).
• The alternative fuel vehicle refueling property credit      under Code Sec. 30C is retroactively extended for two years through 2013      so that taxpayers can claim a 30% credit for qualified alternative fuel      vehicle refueling property placed in service through Dec. 31, 2013,      subject to the $30,000 and $1,000 thresholds.
• The credit for 2- or 3-wheeled plug-in electric      vehicles under Code Sec. 30D is modified and retroactively extended for      two years through 2013.
• The cellulosic biofuel producer credit under Code Sec.      40(b) is modified and extended one year through 2013.
• The credit for biodiesel and renewable diesel under      Code Sec. 40A is retroactively extended for two years through 2013.
• The production credit for Indian coal facilities placed      in service before 2009 under Code Sec. 45(e)(10) is extended one year. The      credit applied to coal produced by the taxpayer at an Indian coal      production facility during the 8-year period beginning on Jan. 1, 2006,      and sold by the taxpayer to an unrelated person during such 8-year period      and the tax year.
• The credits with respect to facilities producing energy      from certain renewable resources under Code Sec. 45 is modified and      extended one year. A facility using wind to produce electricity will be a      qualified facility if it is placed in service before 2014.
• The credit for energy-efficient new homes under Code      Sec. 45L is retroactively extended for two years through 2013.
• The credit for energy-efficient appliances under Code      Sec. 45M is retroactively extended for two years through 2013.
• The additional depreciation deduction allowance for      cellulosic biofuel plant property under Code Sec. 168(l)(2) is modified      and extended one year.
• The special rule for sales or dispositions to implement      Federal Energy Regulatory Commission (FERC) or State electric      restructuring policy for qualified electric utilities is retroactively      extended for two years through 2013.
• The alternative fuels excise tax credits under Code      Sec. 6426(d )Code Sec. (5) and Code Sec. 6426(e)(3) for sales or use of      alternative fuels or alternative fuel mixtures is retroactively extended      for two years through 2013.

Pension provision. For transfers after Dec. 31, 2012, in tax years ending after that date, plan provisions in an applicable retirement plan (which includes a qualified Roth contribution program) can allow participants to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contribution under Code Sec. 408A(e).

December is traditionally a month for giving generously to charities, friends and family. But it’s also a time that can have a major impact on the tax return you’ll file in the New Year. Here are some “Season of Giving” tips from the IRS covering everything from charity donations to refund planning:

• Contribute to Qualified      Charities.       If you plan to take an itemized charitable deduction on your 2012 tax      return, your donation must go to a qualified charity by Dec. 31. Ask the      charity about its tax-exempt status. You can also visit IRS.gov and use      the Exempt Organizations Select Check tool to check if your favorite      charity is a qualified charity. Donations charged to a credit card by Dec.      31 are deductible for 2012, even if you pay the bill in 2013. A gift by      check also counts for 2012 as long as you mail it in December. Gifts given      to individuals, whether to friends, family or strangers, are not      deductible.
• What You Can Deduct.  You generally can      deduct your cash contributions and the fair market value of most property      you donate to a qualified charity. Special rules apply to several types of      donated property, including clothing or household items, cars and boats.
• Keep Records of All      Donations.       You need to keep a record of any donations you deduct, regardless of the      amount. You must have a written record of all cash contributions to claim      a deduction. This may include a cancelled check, bank or credit card      statement or payroll deduction record. You can also ask the charity for a      written statement that shows the charity’s name, contribution date and      amount.
• Gather Records in a Safe      Place.       As long as you’re gathering those records for your charitable      contributions, it’s a good time to start rounding up documents you will      need to file your tax return in 2013. This includes receipts, canceled      checks and other documents that support income or deductions you will      claim on your tax return. Be sure to store them in a safe place so you can      easily access them later when you file your tax return.

2013 Standard Mileage Rates Up 1 Cent per Mile for Business, Medical and Moving

WASHINGTON — The Internal Revenue Service today issued the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 56.5 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable      organizations

The rate for business miles driven during 2013 increases 1 cent from the 2012 rate.  The medical and moving rate is also up 1 cent per mile from the 2012 rate.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.  In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51.  Notice 2012-72 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

The IRS warns consumers about a new tax scam that uses a website that mimics the IRS e-Services online registration page.

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https://jobstaxcredit.illinois.gov/SBJCTC-FLYER.pdf

https://jobstaxcredit.illinois.gov/SBJCTC_FAQ_061112%20.pdf

https://jobstaxcredit.illinois.gov/ProgramDetails.aspx - details on the program itself

http://www.revenue.state.il.us/Businesses/TaxInformation/Payroll/SmallBusinessCredit.htm - DOR website on how to claim the credit

https://jobstaxcredit.illinois.gov/RegisterBusiness.aspx - page for a company to register for the program

Who is subject to the employer mandate? Only an “applicable large employer,” defined as someone who employed an average of at least 50 full-time employees during the preceding calendar year, is subject to the requirement to offer coverage. Most small businesses, since they have fewer than 50 employees, are thus exempt from the employer requirement. In counting the number of employees for purposes of determining whether an employer is an applicable large employer, a full-time employee (meaning, for any month, an employee working an average of at least 30 hours or more each week) is counted as one employee and all other employees are counted on a pro-rated basis. However, even an employer with 50 or more employees isn't subject to the penalty for not offering coverage if the employer doesn't have any full-time employees who are certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. In other words, if an employer doesn't have any full-time employees who have a lower income that might qualify him or her to receive a subsidy when purchasing a health plan in the proposed health insurance exchange, the employer will not pay a “pay or play” penalty.

Penalty for employers not offering coverage. An applicable large employer who fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month is subject to a penalty if at least one of its full-time employees is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to the employee. The penalty for any month is an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000. For example, if an employer fails to offer minimum essential coverage and has 60 full-time employes, ten of whom receive a tax credit for the year for enrolling in a state exchange-offered plan, the employer will owe $2,000 for each employee over the 30-employee threshold, for a total penalty of $60,000 ($2,000 multiplied by 30 (60 minus 30)). This penalty is assessed on a monthly basis.

Penalty for employers that offer coverage but have at least one employee receiving a premium tax credit. An applicable large employer who offers coverage but has at least one full-time employee receiving a premium tax credit or cost-sharing reduction is subject to a penalty. The penalty is an excise tax that is imposed for each employee who receives a premium tax credit or cost-sharing reduction for health insurance purchased through a state exchange. For each full-time employee receiving a premium tax credit or cost-sharing subsidy through a state exchange for any month, the employer is required to pay an amount equal to one-twelfth of $3,000. The penalty for each employer for any month is capped at an amount equal to the number of full-time employees during the month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) in excess of 30, multiplied by one-twelfth of $2,000. For example, if an employer offers health coverage and has 60 full-time employees, 15 of whom receive a tax credit for the year for enrolling in a state exchange-offered plan, the employer will owe a penalty of $3,000 for each employee receiving a tax credit, for a total penalty of $45,000. The maximum penalty for this employer is capped at the amount of the penalty that it would have been assessed for a failure to provide coverage, or $60,000 ($2,000 multiplied by 30 (60 minus 30)). Since the calculated penalty of $45,000 is less than the maximum amount, the employer pays the $45,000 calculated penalty. This penalty is assessed on a monthly basis.

Requirement to offer “free choice vouchers.” After 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage will have to provide qualified employees with a voucher whose value could be applied to purchase of a health plan through the Insurance Exchange. Qualified employees would be those employees: who do not participate in the employer's health plan; whose required contribution for employer sponsored minimum essential coverage exceeds 8%, but does not exceed 9.8% of household income; and whose total household income does not exceed 400% of the poverty line for the family. The value of the voucher would be equal to the dollar value of the employer contribution to the employer offered health plan. Employers providing free choice vouchers will not be subject to penalties for employees that receive a voucher.

If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call.

Individual mandate. The new law contains an “individual mandate”—a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty after 2013. Under the new law, those without qualifying health coverage will pay a tax penalty of the greater of: (a) $695 per year, up to a maximum of three times that amount ($2,085) per family, or (b) 2.5% of household income over the threshold amount of income required for income tax return filing. The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, aliens not lawfully present in the U.S., incarcerated individuals, those for whom the lowest cost plan option exceeds 8% of household income, those with incomes below the tax filing threshold (in 2010 the threshold for taxpayers under age 65 is $9,350 for singles and $18,700 for couples), and those residing outside of the U.S.

Premium assistance tax credits for purchasing health insurance. The health care legislation provides tax credits to low and middle income individuals and families for the purchase of health insurance. Specifically, for tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an Exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an Exchange. Under the provision, an eligible individual enrolls in a plan offered through an Exchange and reports his or her income to the Exchange. Based on the information provided to the Exchange, the individual receives a premium assistance credit based on income and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an Exchange, the premium payments are made through payroll deductions.

The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis.

Higher Medicare taxes on high-income taxpayers. High-income taxpayers will be subject to a tax increase on wages and a new levy on investments.

Higher Medicare payroll tax on wages. The Medicare payroll tax is the primary source of financing for Medicare's hospital insurance trust fund, which pays hospital bills for beneficiaries, who are 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker's wages without limit. Under the provisions of the new law, which take effect in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Self-employed persons will pay 3.8% on earnings over the threshold.

Medicare payroll tax extended to investments. Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000. Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income is reduced by properly allocable deductions to such income. However, the new tax won't apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax.

Floor on medical expenses deduction raised from 7.5% of adjusted gross income (AGI) to 10%. Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer's AGI. The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.

Limit reimbursement of over-the-counter medications from HSAs, FSAs, and MSAs. The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA), effective for tax years beginning after Dec. 31, 2010.

Increased penalties on nonqualified distributions from HSAs and Archer MSAs. The new law increases the tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.

Limit health flexible spending arrangements (FSAs) to $2,500. An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.

Dependent coverage in employer health plans. Effective on Mar. 30, 2010, the new law extends the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Excise tax on indoor tanning services. The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.

Liberalized adoption credit and adoption assistance rules. For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011. The adoption assistance exclusion is also increased by $1,000.

I hope this information is helpful. If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call.

Tax credits to certain small employers that provide insurance. The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for nonelective contributions to purchase health insurance for their employees. The credit can offset an employer's regular tax or its alternative minimum tax (AMT) liability.

Small business employers eligible for the credit. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000.

Years the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase.

Calculating the amount of the credit. For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer's nonelective contributions toward the employees' health insurance premiums. The credit phases out as firm-size and average wages increase.

Special rules. The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees' health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the other 50% of the premium cost.

Self-employed individuals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages.

Most small businesses exempted from penalties for not offering coverage to their employees. Although the new law imposes penalties on certain businesses for not providing coverage to their employees (so-called “pay or play”), most small businesses won't have to worry about this provision because employers with fewer than 50 employees aren't subject to the “pay or play” penalty. For businesses with at least 50 employees, the possible penalties vary depending on whether or not the employer offers health insurance to its employees. If it does not offer coverage and it has at least one full-time employee who receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment. So, for example, an employer with 51 employees who doesn't offer health insurance to his employees will be subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of its full-time employees in excess of 30). These provisions take effect Jan. 1, 2014.

The “Cadillac tax” on high-cost health plans. The new law places an excise tax on high-cost employer-sponsored health coverage (often referred to as “Cadillac” health plans). This is a 40% excise tax on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers themselves unless they are self-funded (this typically occurs at larger firms). However, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.

Here are the specifics: The new tax, which applies for tax years beginning after Dec. 31, 2017, places a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans will be disregarded in applying the tax. The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than projected. Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.

If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call.

The President recently signed into law the “Hiring Incentives to Restore Employment Act of 2010” (the HIRE Act, P. L. 111-47, 03/18/2010). The centerpiece of this Act is a payroll tax holiday and up-to-$1,000 tax credit for businesses that hire unemployed workers. In addition to these new hiring incentives, the HIRE Act also includes a one-year extension of the enhanced small business expensing option under Code Sec. 179 . Both of these provisions are extremely important to many businesses.

The President recently signed into law the “Hiring Incentives to Restore Employment Act of 2010” (the HIRE Act, P. L. 111-47, 03/18/2010). The centerpiece of this Act is a payroll tax holiday and up-to-$1,000 tax credit for businesses that hire unemployed workers. In addition to these new hiring incentives, the HIRE Act also includes a one-year extension of the enhanced small business expensing option under Code Sec. 179 . Both of these provisions are extremely important to many businesses.

Payroll tax holiday and up-to-$1,000 credit for employers who hire unemployed workers. To help stimulate the hiring of workers by the private sector, the new law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. A company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800—the maximum amount of wages subject to Social Security taxes—by the end of the year. As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

Workers hired after the date of introduction of the legislation (Feb. 3, 2010) are eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after March 18 receive the exemption for payroll taxes. Some additional features of the new hiring incentive include:

• The tax benefit of the new incentive is immediate. It puts money into a business' cash flow immediately, since the tax is simply not collected in the first place.
• The tax benefit generally applies only to private-sector employment, including nonprofit organizations—public sector jobs are generally not eligible for either benefit. However, employment by a public higher education institution qualifies.
• There is no minimum weekly number of hours that the new employee must work for the employer to be eligible, and there is no limit on the dollar amount of payroll taxes per employer that may be forgiven.
• For workers that would otherwise be eligible for the Work Opportunity Tax Credit (i.e., another type of employment tax credit), the employer must select one benefit or the other for 2010. There is no double dipping.
• An employer can't claim the new tax breaks for hiring family members.
• A worker who replaces another employee who performed the same job for the employer isn't eligible for the benefit, unless the prior employee left the job voluntarily or for cause.
• For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she hasn't been employed for more than 40 hours during the 60-day period ending on the date the employment begins.
• The incentive isn't biased towards either low-wage or high-wage workers. Under the measure, a business saves 6.2% on both a $40,000 worker and a $90,000 worker.
• The payroll tax holiday doesn't apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the fist calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of 2010.
• The Act creates a similar new set of rules allowing a payroll tax holiday for railroad retirement tax purposes.
• The credit for retaining qualifying new hires is the lesser of $1,000 or 6.2% of the wages paid by the taxpayer to the retained worker during the 52-consecutive-week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker's wages during the 52-consecutive-week period exceed $16,129.03. However, the credit isn't available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers).

President Obama recently said that he wants a tax reform/deficit reduction package by August and lawmakers have many proposals to consider. The President has introduced a $3.77 trillion budget for fiscal year (FY) 2014 with a host of tax reform proposals, the House and Senate Budget Committees have approved competing deficit reduction and tax reform blueprints, other committees are exploring ideas for tax reform, and private groups, most notably authors of the Simpson-Bowles Plan, are also making proposals. Whatever proposals are adopted, the outcome is sure to impact your tax strategy and planning.

President Obama recently said that he wants a tax reform/deficit reduction package by August and lawmakers have many proposals to consider. The President has introduced a $3.77 trillion budget for fiscal year (FY) 2014 with a host of tax reform proposals, the House and Senate Budget Committees have approved competing deficit reduction and tax reform blueprints, other committees are exploring ideas for tax reform, and private groups, most notably authors of the Simpson-Bowles Plan, are also making proposals. Whatever proposals are adopted, the outcome is sure to impact your tax strategy and planning.

All of the proposals have one common goal: reduce the federal government's approximate $16 trillion federal budget deficit. To reduce the budget deficit, many of the plans propose to cut spending and raise revenues. Lawmakers and the White House also want to replace sequestration (across-the-board spending cuts for many federal agencies) for FY 2014 and beyond. Replacing sequestration will require spending cuts, new revenue or a combination of both. Let's take a look at how some of the tax proposals would affect individuals, businesses and others.

Individuals

The American Taxpayer Relief Act of 2012 (ATRA), signed into law on January 2, 2013, set the individual tax rates at 10, 15, 25, 28, 33, 35 and 39.6 percent for 2013 and beyond. The House GOP budget blueprint would consolidate the current seven individual income tax rate brackets into two rates. The lower rate would be 10 percent with the goal of a top rate of 25 percent. The Simpson-Bowles plan also calls for lower rates but does not specify the amounts; however, lower rates would be contingent on eliminating certain tax credits and deductions, possibly some popular ones such as the home mortgage interest deduction. President Obama has not proposed any changes to the current individual income tax rates.

President Obama has, however, proposed a minimum 30 percent tax on individuals with incomes over $1 million (full phase in at $2 million).  This was known as the "Buffett Rule" (now called the Fair Share Tax).  President Obama would also limit the tax rate at which higher income individuals can reduce their tax liability to a maximum of 28 percent. This limit would apply to all itemized deductions; foreign excluded income; tax-exempt interest; employer sponsored health insurance; retirement contributions; and selected above-the-line deductions. Another proposal would limit contributions and accruals on tax-favored retirement accounts, including IRAs, qualified plans, tax-sheltered annuities, and deferred compensation plans.

The budget blueprint put forward by Senate Democrats makes similar proposals. The Senate plan would impose across-the-board limits on itemized deductions claimed by the top two percent of income earners, by capping the rate at which itemized deductions and other tax preferences reduce tax liability, a percentage of income cap, or a specific dollar cap.  The Senate plan also proposes to change, without giving details, unspecified itemized deductions into tax credits.

Not surprisingly, the House plan, written by the GOP, does not include these proposals.  Along with consolidating the individual tax rates, the House blueprint would repeal the 3.8 percent net investment income (NII) surtax and the 0.9 percent Additional Medicare Tax, both of which took effect in 2013. The House plan also calls for repealing the alternative minimum tax (AMT). The House plan also calls for tax simplification but does not give details.

Another proposal endorsed by the President but which will be a difficult sale in Congress is to increase the federal estate tax. ATRA "permanently" extended the estate tax at a maximum rate of 35 percent with a $5 million exclusion (indexed for inflation).  President Obama wants to raise the maximum rate to 45 percent with a $3.5 million exclusion (not indexed for inflation) after 2017. 

Businesses

Reducing the U.S. corporate tax rate is a common goal of many of the tax reform proposals but they take different approaches. President Obama has said he would support lowering the corporate tax rate in exchange for businesses giving up unspecified tax preferences. These could include tax incentives for fossil fuels, the Code Sec. 199 deduction and more. The House blueprint would reduce the top corporate tax rate to 25 percent, paid for by tax savings elsewhere. The Simpson-Bowles plan also calls for a reduction in the corporate tax rate, contingent on businesses relinquishing unspecific tax preferences.

President Obama and the House and Senate budgets also propose a number of incentives to encourage business spending and job creation. These include:

• Enhanced small business expensing (Obama and House but at different amounts);
• Permanent research tax credit (Obama, House and Senate);
• Temporary tax credit for increasing payrolls (Obama); and
• Special incentives for manufacturing in the U.S. (Obama).

Another key difference among the competing proposals: the House budget plan would repeal the Patient Protection and Affordable Care Act, including all of its business tax-related provisions, such as employer-shared responsibility provisions, the medical device excise tax, and more.  The Senate approved a non-binding resolution to repeal the medical device tax but is not expected to go along with repeal of the entire Affordable Care Act.

Internet sales tax

In May, the Senate is expected to approve the Marketplace Fairness Act (H.R. 743). The bill gives states the authority to compel online merchants, no matter where they are located, to collect sales tax at the time of a transaction.  However, states would be able to compel collection of sales tax only after they have simplified their sales tax laws, such as by adopting the Streamlined Sales and Use Tax Agreement.  The bill has the support of President Obama. However, the bill may not pass in the House, where many lawmakers view it as a tax increase.

Discussion drafts

The two Congressional tax writing committees – House Ways and Means and Senate Finance – are engaged in discussions among their members over tax reform.  Ways and Means has produced three detailed discussion drafts exploring possible approaches to reforming the taxation of financial products, the taxation of small businesses and moving the U.S. to a territorial system of taxation. Ways and Means Chair Dave Camp, R-Mich., has promised to introduce tax reform legislation this year. Senate Finance has also produced four discussion drafts, less detailed than the House drafts, on simplifying the Tax Code, business taxation and education, and infrastructure, energy and natural resources. Senate Finance Committee Chair Max Baucus, D-Mont., has pledged his commitment to seeing tax reform through before his retirement, which he announced would start at the end of 2014.

Looking ahead

Tax reform coupled with deficit reduction is starting to gain momentum. Whether this will lead to legislation this summer or before year-end is unclear. As long as the key players continue their discussions, there is the chance of tax reform.

Our office will keep you posted of developments. Please contact our office if you have any questions about the tax reform proposals we have reviewed.

Did you owe tax on your 2012 tax return? Did you receive a sizeable refund? Or, conversely, did you receive a smaller refund than you expected? If so, take another look at your tax return from this past year. It is quite possible that by making a few changes, you could put more money in your pocket in the short term. And by examining your investments as they are reported on your tax return, you may be able to strategize for the long-term future. Trying to implement this type of plan may seem difficult at first. However, just by looking at your tax return, you can start the critical planning that can lead you to broader goals of financial independence and a comfortable retirement.

Did you owe tax on your 2012 tax return? Did you receive a sizeable refund? Or, conversely, did you receive a smaller refund than you expected? If so, take another look at your tax return from this past year. It is quite possible that by making a few changes, you could put more money in your pocket in the short term. And by examining your investments as they are reported on your tax return, you may be able to strategize for the long-term future. Trying to implement this type of plan may seem difficult at first. However, just by looking at your tax return, you can start the critical planning that can lead you to broader goals of financial independence and a comfortable retirement.

Federal withholding

If you received a large tax refund, it might be time for you to adjust the amount of tax the federal government withholds from your paycheck. Although next year your refund check may not be as large, you will have the advantage of seeing a larger sum deposited directly into your pocket every month. To adjust your withholding, fill out and sign a Form W-4, and submit it to your employer. You would want to do this in cases where your adjustments to income, exemptions, and deductions remain relatively steady from year-to-year, and where the government consistently is required to give you a large refund.

If you do not change your withholding allowances, the government essentially is holding your money for a year without paying any interest on it. You may lose some potential investment opportunity or, at the very least, the ability to increase your monthly discretionary income. On the other hand, many taxpayers prefer to receive the large refund check after tax filing season because it is a no-hassle way to ensure large savings at the end of the year.

Conversely, many taxpayers may want to change their withholding allowances because they owe the government a significant amount of money at the end of the year. Taxpayers who expect to owe at least $1,000 in tax for the 2013 tax year, after subtracting withholding and any refundable credits, and who also expect their 2013 withholding and credits to be significantly less than the projected tax owed for 2013, may need to file estimated taxes. Failure to do so could result in penalties. Alternatively, taxpayers should consider making quarterly estimated tax payments, especially if they anticipate a significant amount of investment gains for the year or other income unrelated to wage compensation.

State withholding

Some people are entirely exempt from state tax, but it is withheld from their paychecks nevertheless. At the end of each year, they may include the amount of their state taxes in their itemized deductions, but then receive a refund which they have to declare as income in the next year. This problem particularly applies to active duty military families, many of whom are posted in states other than their state of residency. Military families can check with their state income tax authority to see if there is an appropriate form that can be completed and filed, which would exempt them from withholding. A higher adjusted gross income (AGI), even if it is subsequently reduced by itemized deductions, can erode other adjustments to income, such as a deduction for student loans, IRA contributions, higher education expenses, and more because of certain AGI caps on these benefits.

Tax rates and adjusted gross income

As you may have heard, Congress allowed the Bush-era tax cuts to expire for higher-income earners. That means joint filers with more than $450,000 of adjusted gross income ($400,000 for single individuals) are now in the 39.6-percent tax bracket. Taxpayers at this level of income or above are also subject to a higher long-term capital gains tax rate: 20 percent, up from 15 percent paid by other taxpayers.

In addition, for tax years beginning in 2013, the 33-percent tax bracket for individual taxpayers ends at $398,350 for married individuals filing joint returns, heads of households, and single individuals. If you were hovering near the bottom of the 35-percent bracket for the 2012 tax year, then you might want to see if you can readjust your income so that you fall within the 33-percent category.

Higher-income taxpayers also have two new taxes to worry about for 2013 and beyond. Joint-filing taxpayers with modified adjusted gross income of $250,000 ($200,000 for single filers) are also subject to the 3.8-percent surtax on net investment income and a .9-percent Additional Medicare Tax. Look at your adjusted gross income for last year. Does it approach these figures? Is it on the edge of the income brackets? Will stock market increases this year put you over the top of those income thresholds? If so, it may be time to find ways to reduce your income for 2013.

Investments

At some point in your efforts over the years to accumulate a savings nest egg, you will need to consider diversification, the process of putting your money in the right kind of investment vehicles to satisfy your personal risk strategy and achieve your goals. Looking at your tax return will help you decide whether the investments you now have are the right ones for you. For example, if you are in a high tax bracket and need to diversify away from common stocks, investing in tax-exempt bonds might help, especially if you have state income taxes to worry about, too.

Reviewing the Schedule D and Form 8949, which cover Capital Gains and Losses from last year's return and from the past three or four years, can be an eye-opener for many. Did you hold stocks long enough to be entitled to the long-term capital gains rate? Did you try to balance short-term gains with short-term losses? Are you bouncing from one investment trend to another without a long-term investment plan that achieves long-term needs? Are your mutual funds "tax smart"? Become familiar with different types of banking institutions and their products. Find out about CDs, money-market funds, government securities, mutual funds, index funds, and sector funds and how they interrelate with the determination of your tax liability each year. You may want to put that knowledge to work in your investment strategy.

Medical costs

Should you be taking advantage of the medical expense deduction? Many people assume that with the 10 percent adjusted gross income floor on medical expenses now imposed for tax years starting in 2013 (7.5 percent for seniors) that it doesn't pay for them to keep track of expenses to test whether they are entitled to itemize. But with the premiums for certain long-term care insurance contracts now counted as a medical expense, some individuals are discovering that along with other health insurance premiums, deductibles and timing of elective treatments, the medical tax deduction may be theirs for the taking.

Retirement planning

Don't forget to protect for eventualities. Are you maximizing the amount that Uncle Sam allows you to save tax-free for retirement? A look at your W-2 for the year, and at the retirement contribution deductions allowed in determining adjusted gross income should tell you a lot. Should your spouse set up his or her own retirement fund, too? Are you over-invested in tax-deferred retirement plans? If so, you may lose a significant amount of your nest egg to tax after retirement.  

When you are reviewing last year's tax return, it may help to review some of what you've learned from it. This could foster an important conversation with your tax advisor about how to establish or modify your plan for your financial future. If you would like to review last year's completed tax return with future planning in mind, please feel free to give us a call and set up a time when we can meet and discuss this matter.

Questions over the operation of the new 3.8 percent Medicare tax on net investment income (the NII Tax) continue to be placed on the IRS's doorstep as it tries to better explain the operation of the new tax.  Proposed "reliance regulations" issued at the end in 2012 (NPRM REG-130507-11) "are insufficient in many respects," tax experts complain, as the IRS struggles to turn its earlier guidance into final rules.

Questions over the operation of the new 3.8 percent Medicare tax on net investment income (the NII Tax) continue to be placed on the IRS's doorstep as it tries to better explain the operation of the new tax.  Proposed "reliance regulations" issued at the end in 2012 (NPRM REG-130507-11) "are insufficient in many respects," tax experts complain, as the IRS struggles to turn its earlier guidance into final rules.

A public hearing on the existing regulations, held at IRS headquarters in Washington, D.C., in early April 2013, only confirmed how the application of the NII Tax to certain categories of income—particularly income arising from "passive activities"—is challenging even the experts. Nevertheless, taxpayers are not getting a reprieve from the immediate application of this new tax.  The 3.8 percent Medicare surtax on net investment income (NII) became effective January 1, 2013. Current confusion over exactly how the 3.8 percent operates can impact on tax strategies that should be put into motion in 2013. Any misinterpretation can also bear on 2013 estimated tax that may be due to cover any 3.8 percent NII Tax liability.

NII Tax Thresholds

For tax years beginning after December 31, 2012, the NII surtax on individuals equals 3.8 percent of the lesser of: net investment income for the tax year, or the excess, if any, of:

• the individual's modified adjusted gross income (MAGI) for the tax year, over
• the threshold amount.

The threshold amount in turn is equal to:

• $250,000 in the case of a taxpayer making a joint return or a surviving spouse,
• $125,000 in the case of a married taxpayer filing a separate return, and
• $200,000 in any other case.

Trusts and estates are also subject to the NII surtax, to the extent of the lesser of: (i) undistributed net investment income, or (ii) the excess of adjusted gross income over the dollar amount at which the highest tax bracket begins (which, for 2013, is $11,950).

Net Investment Income

The primary confusion over application of the 3.8 percent NII Tax revolves around finding a precise definition of "net investment income" as enacted by Congress. To appreciate the complexity of the task, just look at the applicable Internal Revenue Code provision. Code Sec. 1411(c)(1) defines net investment income as the sum of:

• Category (i) income: Gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in Code Sec. 1411(c)(2);
• Category (ii) income: Other gross income derived from a trade or business described in Code Sec. 1411(c)(2); and
• Category (iii) income: Net gain attributable to the disposition of property, other than property held in a trade or business not described in Code Sec. 1411(c)(2); over

Deductions properly allocable to such gross income or net gain.

A Code Sec. 1411(c)(2) trade or business includes a passive activity under Code Sec. 469 with respect to the taxpayer or trading in financial instruments or commodities.

Comment.  Code Sec 1411 effectively creates a new tax and a new tax base, on top of the income tax, alternative minimum tax, self-employment tax and payroll taxes. Nevertheless the Preamble to the proposed regs states that, except as otherwise provided, the income tax rules should apply to Code Sec. 1411 unless good cause otherwise exists. Practitioners have asked the IRS that the final regulations give greater reassurance of this general rule.

Complexity

The IRS has stated that the principal purpose of Code Sec. 1411 is "to impose a tax on unearned income or investments of certain individuals, estates, and trusts." Unfortunately, Code Sec. 1411 is not so direct and simple, with its three categories of income (that is, (i), (ii) and (iii), above), complicating matters, albeit in an effort to close every door to those who try to "game the system."

Application of the 3.8 percent NII Tax to capital gains and dividends from a personal stock portfolio is clear under this rule of thumb. But clarity breaks down when a "trade or business" is thrown into the mix and the concept of "passive activity" is added to it.

If gain or other income is the result of an active business activity, it generally escapes NII Tax. However, when the "active" business is a passive activity (for example, a rental business), it may be deemed to generate income that is subject to the NII Tax. Furthermore, when a passive activity is not merely incidental to a business however otherwise active that business should be, the NII Tax also becomes an issue. 

Passive Activity

Any revised or additional rules from the IRS on the application of the NII Tax on passive activities should be made more user friendly to the broad middle range of taxpayers and their advisors, one expert at the hearing recommended.  The IRS should err on the side of explaining things clearly and simply, even at the expense of not covering every possible nuance of interpretation.

At the same time, however, other experts are asking for more detail, at least in the way of clarification. For example, the IRS has stated that passive activity for NII Tax purposes should be applied within a narrower scope than the passive activity loss rules under Code 469.  Those Code Sec. 469 rules restrict "passive losses" from reducing income that is not "passive income."  Experts want the IRS to explain exactly what they mean by a "narrower scope."

Self-Rental Activities/Grouping

The self-rental recharacterization rule under Code Sec. 469 affects taxpayers who rent property to a trade or business in which they materially participate. Concern has been expressed over the possibility of interpreting net investment income under Code Sec. 1411 to include rental income from a self-rental activity grouped with a trade or business activity in which the taxpayer materially participates.

The material participation and trade or business requirements should be tested on the grouped activity as a whole rather than on a component basis, one expert in particular stressed at the hearing. If that test is passed, he argued, the trade or business income and rental income from the grouped activity should be excluded from the reach of the NII Tax. For example, the owners of self-rental properties should not have that rent considered as separate from their overall business activity and subject to the net investment tax simply because properties are held in a separate LLC to avoid tort liability.

Regrouping deadline

The proposed regulations permit businesses subject to the NII Tax to elect to regroup their activities for passive-loss purposes in 2013 or 2014. This regrouping election allows taxpayers with a fresh start to accommodate the new NII surtax. Without permitting regroupings, taxpayers would be bound by their original grouping decisions, some of which may have been made as many as 20 years ago, only for purpose of Code Sec. 469 passive loss rules and not the NII Tax. Some small business representatives are also concerned that, because of the complexity of the rules, the final regulations should extend the deadline for a regrouping election through 2015.

Application of the net investment income tax is particularly difficult to get a handle on in a variety of situations.  Unfortunately, however, at 3.8 percent, it is costly enough not to be ignored. 

If you have any questions about how the NII Tax may apply to your business, rental operations, or overall investment strategy, please do not hesitate to call our office.

Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.

Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.

For 2010-2013, for-profit employers can claim a credit of 35 percent of the employer's nonelective contributions, increasing to 50 percent for 2014 and 2015. Nonprofit employers can claim a credit of 25 percent through 2013, and 35 percent for the two succeeding years. Beginning in 2012, the credit for nonprofit employers is limited to the payroll taxes paid by the employer.

Small employers

Employers can claim the full credit if their full-time equivalent (FTE) employees are 10 or less, and their average annual wages per employee are $25,000 or less. FTEs are determined by figuring total hours of service for all employees and dividing the total by 2,080.

The credit is phased out for employers with 11 to 25 employees or with average wages between $25,000 and $50,000. The credit percentage is reduced 6.67 percent per "excess" employee (over 10) and four percent for each $1,000 of average wages in excess of $25,000.

To determine the amount of the credit, employers must add up the total premiums they paid on behalf of their employees during the year, subject to the state average premium limit. This total is then multiplied by the applicable percentage (25 or 35 percent for 2013, minus any phase-out). The credit is then reduced for FTEs in excess of 10, and for average annual wages (in units of $1,000) over $25,000. The result is the total credit that the employer can claim.

Other requirements

Under current law, employers must pay at least 50 percent of the insurance costs and must pay a uniform percentage for all employees. The credit is reduced if the employer premiums exceed the state's average premium for small group markets.

In its proposed fiscal year 2014 budget, the Obama administration would modify or eliminate some of these requirements. The credit phase-out would apply to employers with 21-50 employees, rather than 11-25. The phase-out rate would also be more gradual. Furthermore, the administration would eliminate the requirement that employers make a uniform contribution for each employee, and would eliminate the limit for state average premiums.

Reports indicate that the small business health insurance credit is being underutilized, with many businesses leaving this tax money on the table without claiming it or arranging their affairs to do so.

If you have any questions about how you might be able to position your business to claim this credit or claim a larger credit, do not hesitate to call this office for an update.

A business that manufactures products to be sold, or purchases products for resale, must value its product inventory at the beginning and the end of each tax year to determine the cost of goods sold (COGS) during the year. The business determines its gross profits by deducting COGS from its gross receipts for the year. The business then deducts its other business expenses from gross profits, to determine its net (taxable) income for the year.

A business that manufactures products to be sold, or purchases products for resale, must value its product inventory at the beginning and the end of each tax year to determine the cost of goods sold (COGS) during the year. The business determines its gross profits by deducting COGS from its gross receipts for the year. The business then deducts its other business expenses from gross profits, to determine its net (taxable) income for the year.

Certain expenses are included in COGS. Expenses that are included in COGS cannot be deducted again as a business expense. COGS expenses include:

• The cost of products or raw materials, including freight or shipping charges;
• The cost of storing products the business sells;
• Direct labor costs for workers who produce the products; and
• Factory overhead expenses.

Purchased inventory

If the business purchases its inventory for resale, its inventory costs are the invoice price plus transportation and other necessary expenses, less discounts.  Discounts that must be deducted from the costs of purchased inventory include trade discounts, manufacturer's rebates, and cash discounts.

Trade discounts are a reduction in the price of goods that a manufacturer or wholesaler provides to a retailer.  It includes a discount that is always allowed, regardless of the time of payment. A manufacturer's rebate is based on the dealer's purchases during the year. A cash discount is a reduction in the invoice price that the seller provides if the dealer pays immediately or within a specified time. The cash discount may reduce COGS, or it may be treated separately as gross income. Certain excise tax reimbursements may reduce the value of ending inventory and therefore reduce COGS.   

Methods of accounting

It is usually impractical to associate items of intermingled or fungible inventory with specific invoices and costs. Instead, taxpayers use certain assumptions or methods of accounting to identify the goods on hand and their costs. The traditional assumptions include FIFO (first-in, first-out) and LIFO (last-in, first-out). In some cases, specific identification is used. The courts have approved the average cost method, although the IRS disagrees with its use. The IRS will permit taxpayers to use other inventory cost assumptions, such as the rolling-average method, if they are reasonable for the taxpayer's trade or business and clearly reflect income.

Under the FIFO, the taxpayer is presumed to sell the oldest goods in inventory and to retain the most-recently produced or purchased items. If production (inventory) costs are rising, the use of FIFO reduces COGS and increases the taxpayer's income. Under LIFO, the taxpayer is presumed to sell the most recently obtained goods and to retain the oldest goods in inventory. Assuming that inventory costs are rising, the LIFO method will increase COGS and decrease the taxpayer's income. Under the average cost method, all units purchased during the year are averaged with the cost of beginning inventory, to determine an average cost.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of May 2013.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of May 2013.

May 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 24-26.

May 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 27-30.

May 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 1-3.

May 10
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 4-7.

Employees who work for tips. Employees who received $20 or more in tips during April must report them to their employer using Form 4070.

May 15
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 8-10.

May 17
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 11-14.

May 22
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 15-17.

May 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 18-21.

May 30
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 22-24.

May 31
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 25-28.

June 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 29-31.