Claiming the Small Business Health Care Tax Credit
If you're a small business owner with fewer than 25 full-time equivalent employees you may be eligible for the small business health care credit that went into effect in 2010.
What is the Small Business Health Care Credit?
The small business health care tax credit, part of the Affordable Care Act enacted in 2010, is specifically targeted to help small businesses and tax-exempt organizations provide health insurance for their employees. Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for this credit.
How Does the Credit Save Me Money?
For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities. An enhanced version of the credit will be effective beginning Jan. 1, 2014 and the rate will increase to 50 percent and 35 percent, respectively.
The amount of the credit you receive works on a sliding scale, so the smaller the business or charity, the bigger the credit. Simply put, if you have more than 10 FTEs or if the average wage is more than $25,000, the amount of the credit you receive will be less.
If you pay $50,000 a year toward workers' health care premiums--and you qualify for a 15 percent credit--you'll save $7,500. If you save $7,500 a year from tax year 2010 through 2013, that's a total savings of $30,000. And, if in 2014 you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $12,000 a year.
Is My Business Eligible for the Credit?
To be eligible for the credit, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs) and those employees must have average wages of less than $50,000 a year.
Let's take a closer look at what this means. A full-time equivalent employee is defined as either one full-time employee or two half-time employees. In other words, two half-time workers count as one full-timer or one full-time equivalent. Here is another example: 20 half-time employees are equivalent to 10 full-time workers. That makes the number of FTEs 10 not 20.
Now let's talk about average wages. Say you pay total wages of $200,000 and have 10 FTEs. To figure average wages you divide $200,000 by 10--the number of FTEs--and the result is your average wage. In this example, the average wage would be $20,000.
Can Tax-Exempt Employers Claim the Credit?
Yes. The credit is refundable for small tax-exempt employers too, so even if you have no taxable income, you may be eligible to receive the credit as a refund as long as it does not exceed your income tax withholding and Medicare tax liability.
Can I Still Claim the Credit Even If I Don't Owe Any Tax This Year?
If you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That's both a credit and a deduction for employee premium payments.
Can I File an Amended Return and Claim the Credit for Previous Tax Years?
If you can benefit from the credit this year but forgot to claim it on your tax return there's still time to file an amended return.
Businesses that have already filed and later find that they qualified in 2010 or 2011 can still claim the credit by filing an amended return for one or both years.
Give us a call if you have any questions about the small business health care credit. And, if you need more time to determine eligibility this year we'll help you file an automatic tax-filing extension.
10 Facts About Mortgage Debt Forgiveness
Canceled debt is normally taxable to you, but there are exceptions. One of those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.
Here are 10 things you should know about Mortgage Debt Forgiveness.
1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes, to pay off credit card debt for example, do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions -- such as insolvency -- may be applicable.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
Don't hesitate to give us a call if you need more information about mortgage debt forgiveness.
Lost Your Job? There Could Be Tax Consequences
Given the current economic conditions, you may be faced with tax questions surrounding a job loss and unemployment issues. Here are some answers:
Q: What if I received unemployment compensation in 2012?
A: Unemployment compensation you received under the unemployment compensation laws of the United States or of a state are considered taxable income and must be reported on your federal tax return. If you received unemployment compensation, you should receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld.
Q: What if I lost my job?
A: The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable.
Q: What if I searched for a job?
A: You may be able to deduct certain expenses you incurred while looking for a new job, even if you did not get a new job. Expenses include travel, resume preparation, and outplacement agency fees. Moving costs for a new job at least 50 miles away from your home may also be deductible.
Q: What if my employer went out of business or in to bankruptcy?
A: Your employer must provide you with a 2012 W-2 Form showing your wages and withholdings by January 31, 2013. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fail to provide you with a Form W-2, contact the IRS. They can help by providing you with a substitute Form W-2. If your employer liquidated your 401(k) plan, you have 60 days to roll it over to another qualified retirement plan or IRA.
If you have experienced a job loss and have questions, please call us. You need to be prepared for the tax consequences.
Spring Cleaning: Tax Records You Can Throw Away
Spring is a great time to clean out that growing mountain of financial papers and tax documents that clutters your home and office. Here's what you need to keep and what you can throw out without fearing the wrath of the IRS.
Let's start with your "safety zone," the IRS statute of limitations. This limits the number of years during which the IRS can audit your tax returns. Once that period has expired, the IRS is legally prohibited from even asking you questions about those returns.
The concept behind it is that after a period of years, records are lost or misplaced and memory isn't as accurate as we would hope. There's a need for finality. Once the statute of limitations has expired, the IRS can't go after you for additional taxes, but you can't go after the IRS for additional refunds, either.
The Three-Year Rule
For assessment of additional taxes, the statute of limitation runs generally three years from the date you file your return. If you're looking for an additional refund, the limitations period is generally the later of three years from the date you filed the original return or two years from the date you paid the tax. There are some exceptions:
If you don't report all your income and the unreported amount is more than 25% of the gross income actually shown on your return, the limitation period is six years.
If you've claimed a loss from a worthless security, the limitation period is extended to seven years.
If you file a "fraudulent" return, or don't file at all, the limitations period doesn't apply. In fact, the IRS can get you at any time.
- If you're deciding what records you need or want to keep, you have to ask what your chances are of an audit. A tax audit is an IRS verification of items of income and deductions on your return. So you should keep records to support those items until the statute of limitations runs out.
Assuming that you've filed on time and paid what you should, you only have to keep your tax records for three years, but some records have to be kept longer than that.
Remember, the three-year rule relates to the information on your tax return. But, some of that information may relate to transactions more than three years old.
Here's a checklist of the documents you should hold on to:
Capital gains and losses. Your gain is reduced by your basis - your cost (including all commissions) plus, with mutual funds, any reinvested dividends and capital gains. But you may have bought that stock five years ago and you've been reinvesting those dividends and capital gains over the last decade. And don't forget those stock splits.
You don't ever want to throw these records away until after you sell the securities. And then if you're audited, you'll have to prove those numbers. Therefore, you'll need to keep those records for at least three years after you file the return reporting their sales.
Expenses on your home. Cost records for your house and any improvements should be kept until the home is sold. It's just good practice, even though most homeowners won't face any tax problems. That's because profit of less than $250,000 on your home ($500,000 on a joint return) isn't subject to taxes under tax legislation enacted in 1997.
If the profit is more than $250,000/$500,000, or if you don't qualify for the full gain exclusion, then you're going to need those records for another three years after that return is filed. Most homeowners probably won't face that issue thanks to the 1997 tax law, but of course, it's better to be safe than sorry.
Business records. Business records can become a nightmare. Non-residential real estate is now depreciated over 39 years. You could be audited on the depreciation up to three years after you file the return for the 39th year. That's a long time to hold on to receipts, but you may need to validate those numbers.
Employment, bank, and brokerage statements. Keep all your W-2s, 1099s, brokerage, and bank statements to prove income until three years after you file. And don't even think about dumping checks, receipts, mileage logs, tax diaries, and other documentation that substantiate your expenses.
Tax returns. Keep copies of your tax returns as well. You can't rely on the IRS to actually have a copy of your old returns. As a general rule, you should keep tax records for 6 years. The bottom line is that you've got to keep those records until they can no longer affect your tax return, plus the three-year statute of limitations.
Social Security records. You will need to keep some records for Social Security purposes, so check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If they're wrong, you'll need your W-2 or copies of your Schedule C (if self-employed) to prove the right amount. Don't dispose of those records until after you've validated those contributions.
Contact us by phone or email if you have any questions about what records you need to keep this spring.
Haven't Filed Your Taxes Yet? Don't Panic
It's April already. Are your taxes done? If not, here's some last-minute tax advice for you:
Don't Procrastinate Anymore - Resist the temptation to put off your taxes until the very last minute. Our office needs time to prepare your return, and we may need to request certain documents from you, which will take additional time.
Don't Panic If You Can't Pay - If you can't immediately pay the taxes you owe, consider some alternatives. You can apply for an IRS installment agreement, suggesting your own monthly payment amount and due date, and getting a reduced late-payment penalty rate. You also have various options for charging your balance on a credit card. There is no IRS fee for credit card payments, but the processing companies charge a convenience fee. Electronic filers with a balance due can file early and authorize the government's financial agent to take the money directly from their checking or savings account on the April due date, with no fee.
- Request an Extension of Time to File - But Pay on Time - If the clock runs out, you can get an automatic six-month extension, bringing the filing date to October 17, 2012. The extension itself does not give you more time to pay any taxes due. You will owe interest on any amount not paid by the April deadline, plus a late-payment penalty if you have not paid at least 90 percent of your total tax by that date. Call us for a variety of easy ways to apply for an extension.
Remember: Get your documents to us as soon as you can, and we'll help you take care of whatever comes up.
Six Facts about the Alternative Minimum Tax
The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT provides an alternative set of rules for calculating your income tax. In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay. If your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.
Here are six facts you should know about the AMT and changes for tax year 2011.
Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers' tax obligations. Congress created the AMT in 1969, targeting higher income taxpayers who could claim so many deductions they owed little or no income tax.
Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.
You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.
The AMT exemption amounts are set by law for each filing status.
For tax year 2011, Congress raised the AMT exemption amounts to the following levels:
$74,450 for a married couple filing a joint return and qualifying widows and widowers;
$48,450 for singles and heads of household;
$37,225 for a married person filing separately.
The minimum AMT exemption amount for a child whose unearned income is taxed at the parents' tax rate has increased to $6,800 for 2011.
If you need information about the AMT and your tax situation, please let us know.
Do You Qualify for the Home Office Deduction?
If you use part of your home for business, you may be able to deduct expenses for the business use of your home, provided you meet certain IRS requirements.
1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:
as your principal place of business, or
- as a place to meet or deal with patients, clients or customers in the normal course of your business, or
- in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.
2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.
3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.
4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
5. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.
If you're not sure whether you qualify for the home office deduction please contact us. We'll help you figure it out.
5 Tips for Taxpayers with Foreign Income
U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2011, may have a U.S. tax liability and a filing requirement in 2012. Here are 5 tips for taxpayers with foreign income.
1. Filing deadline. U.S. citizens and resident aliens residing overseas or those serving in the military outside the U.S. on the regular due date of their tax return have until June 15, 2012 to file their federal income tax return. To use this automatic two-month extension beyond the regular April 17, 2012 deadline, taxpayers must attach a statement to their return explaining which of the two situations above qualifies them for the extension.
2. World-wide income Federal. law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.
3. Tax forms. In most cases, affected taxpayers need to fill out and attach Schedule B, Interest and Ordinary Dividends, to their tax return. Certain taxpayers may also have to fill out and attach to their tax return the new Form 8938, Statement of Foreign Financial Assets. Some taxpayers may also have to file Form TD F 90-22.1 with the Treasury Department by June 30, 2012.
4. Foreign earned income exclusion. Many Americans who live and work abroad qualify for the foreign earned income exclusion. If you qualify for tax year 2011, this exclusion enables you to exempt up to $92,900 of wages and other foreign earned income from U.S. tax.
5. Credits and deductions. You may be able to take either a credit or a deduction for income taxes paid to a foreign country or a U.S. possession. This benefit is designed to lessen the tax burden that results when both the U.S. and another country tax income from that country.
If you had foreign income last year, let us know. We'll help you figure out whether you have any tax liability and if you do, which forms you need to file and when.
Estimated Tax Payments - Q&A
Question: How do I know if I have to file quarterly individual estimated tax payments?
Answer: If you owed additional tax for the prior tax year, you may have to make estimated tax payments for the current tax year.
If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.
If you are filing as a corporation you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.
If you had a tax liability for the prior year, you may have to pay estimated tax for the current year; however, if you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings.
There are special rules for farmers, fishermen, certain household employers, and certain higher taxpayers.
Contact us if you are unsure whether you need to make an estimated tax payment. The first estimated payment for 2012 is due April 17, 2012.
Financial Tips for April 2012
Review Your Retirement Plans
How much have you accumulated so far? How much do you need to retire comfortably at the desired date? Professional advice may be helpful in determining how much you should be saving and what the best investment vehicles are.
Inventory Your Non-Financial Assets
Perform an inventory of your non-financial assets (e.g., home, furniture, cars, personal belongings). Compare this inventory to your property insurance coverage. Is your insurance adequate for your assets? You may need a rider to your policy for certain items such as jewelry. If some assets are no longer in use, consider selling them or donating them to charity. You may be entitled to a deduction based upon the fair market value of the assets.
Review Budget vs Actuals
Compare March income and expenditures with your budget. Make adjustments as appropriate to your April expenditures. Make sure you have invested your planned savings amount for March.
Schedule Estimated Tax Payments
Add the estimated tax payments for the year to your calendar so you don't overlook them later. You might want to attach the payment vouchers to your calendar with a paperclip.
Review Retirement Contributions
Review planned contributions for IRAs, SIMPLE Plans, SEPs, and Keoghs for the preceding tax year. Professional advice should be sought to help you determine the maximum amounts deductible, and whether postponing return filing for the preceding year will help determine the amount and timing of the contribution.
Tax Due Dates for April 2012
Electronic filing of Forms 1098, 1099, and W-2G - File Forms 1098, 1099, or W-2G with the IRS. This due date applies only if you file electronically (not by magnetic media). Otherwise, see February 28. The due date for giving the recipient these forms will still be January 31.
For information about filing Forms 1098, 1099, or W-2G electronically, see Publication 1220, Specifications for Filing Forms 1098, 1099, 5498 and W-2G Magnetically or Electronically.
Electronic filing of Forms W-2 - File copies of all the Forms W-2 you issued for 2011. This due date applies only if you electronically file. Otherwise see February 29. The due date for giving the recipient these forms remains at January 31.
Employees - who work for tips. If you received $20 or more in tips during March, report them to your employer. You can use Form 4070.
Individuals - File an income tax return for 2011 (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic 6-month extension of time to file the return, file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, or you can get an extension by phone if you pay part or all of your estimate of income tax due with a credit card. Then file Form 1040, 1040A, or 1040EZ by October 15.
Household Employers - If you paid cash wages of $1,700 or more in 2011 to a household employee, file Schedule H (Form 1040) with your income tax return and report any employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2010 or 2011 to household employees. Also report any income tax you withheld for your household employees.
Individuals - If you are not paying your 2012 income tax through withholding (or will not pay in enough tax during the year that way), pay the first installment of your 2012 estimated tax. Use Form 1040-ES.
Partnerships - File a 2011 calendar year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner's Share of Income, Credits, Deductions, etc., or a substitute Schedule K-1. If you want an automatic 5-month extension of time to file the return and provide Schedule K-1 or a substitute Schedule K-1, file Form 7004. Then file Form 1065 by September 17.
Electing Large Partnerships - File a 2011 calendar year return (Form 1065-B). If you want an automatic 6-month extension of time to file the return, file Form 7004. Then file Form 1065-B by October 15. March 15 was the due date for furnishing the Schedules K-1 to the partners.
Corporations - Deposit the first installment of estimated income tax for 2012. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in March.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in March.
Employees - Social Security, Medicare, and withheld income tax. File form 941 for the first quarter of 2012. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until May 10 to file the return.
Employers - Federal Unemployment Tax. Deposit the tax owed through March if more than $500.
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