Payroll Tax Cut Extended
(Update December 23, 2011) In a last minute deal right before Christmas, Congress approved a two-month extension of the 2 percent Social Security payroll tax cut.
Under the terms of the agreement, there is no merit for higher income earners to accelerate payroll into the first two months of 2012. If Congress does not extend the 2 percent cut past February 29, 2012, any employee compensation over $18,350 in the first two months (1/6 of the $110,100 Social Security maximum) is paid back in the individual’s 2012 Form 1040.
|
Final Tax Legislation and 2011 Year-End Tax Thoughts
 |
| |
Congress may choose to later retroactively reinstate the 100 percent bonus deduction … but at present, it is more prudent to plan on no extension. |
(Originally published 12/21/2011) Based on the latest news today from Congress, we have an impasse on the extension of the 2 percent payroll tax holiday that was in place throughout 2011. But other key business provisions are expiring without Congressional action, including the bonus depreciation.“The 60 day extension of the 2 percent payroll tax legislation that passed in the Senate on December 17 does not contain an extension of the bonus deprecation deduction,” says Andy Biebl, a tax principal with LarsonAllen.
“Even if there is a last minute deal to come together on extending the 2 percent payroll tax holiday, it is unlikely to catch the expiring depreciation incentives. Accordingly, for calendar year 2012, there will be a 50 percent bonus depreciation deduction, and no bonus allowance after 2012.”
Here is an overview of tax provisions affecting both businesses and individuals, and some thoughts regarding final year-end tax transactions.Business tax developments
100 percent bonus depreciation has not been extended
To entice businesses to purchase new depreciable property and spur economic recovery, Congress enacted a 100 percent first-year bonus depreciation deduction in 2010 that was in effect from September 9, 2010, through December 31, 2011.Bonus depreciation applies to new property rather than used, and generally involves equipment and land improvements but not buildings (farm buildings do qualify). To qualify for the 100 percent deduction, the asset must be placed in service by December 31, 2011, regardless of your fiscal year-end. Congress may choose to later retroactively reinstate the 100 percent bonus deduction (it was previously restored twice in retroactive legislation). But at present, it is more prudent to plan on no extension, Biebl advises.
As an example of a last minute asset addition that could take advantage of 100 percent bonus depreciation, a new business vehicle with a gross vehicle weight (GVR) rating over 6,000 pounds is fully deductible if acquired and placed in service by December 31, 2011.
Section 179 expensing
During 2010 and 2011, with 100 percent bonus depreciation available for new assets, the traditional Section 179 first-year depreciation deduction has importance only for used equipment acquisitions. As another economic recovery incentive, Congress had increased the Section 179 annual limit to $500,000 (applicable for tax years beginning in 2010 and 2011). However, that expanded deduction has now ended, and for tax years beginning in 2012, the Section 179 annual expensing limit drops to $139,000. Further, larger businesses (those with eligible equipment additions over $560,000 for the year) face a phaseout of the Section 179 limit.Tax credits for hiring veterans
The Work Opportunity Tax Credit provides an incentive to businesses that hire specified categories of disadvantaged employees. Congress recently expanded this credit for several categories of military veterans who are hired after November 21, 2011, and before January 1, 2013. These credits range from $2,400 to $9,600 per employee. Employers should scrutinize new hires for any prior military service, and if identified, submit a pre-screening notice (IRS Form 8850) to their state workforce agency to ascertain eligibility. This notice must be submitted within 28 days of the new worker starting employment. Any prior military service has qualifying potential, even if the individual served in the military many years earlier. Tax-exempt employers also qualify for the credit, but at 65 percent of the rate that applies to for-profit employers.HIRE Act Retention Credit
In 2010, a tax waiver exempted the employer’s portion of the 6.2 percent Social Security payroll tax on the wages of qualified new hires (an individual hired after February 3, 2010, and before January 1, 2011, if the worker had been unemployed for the 60 days preceding hire.) For each of these individuals still on the payroll 52 consecutive weeks following initial hire, a tax credit of up to $1,000 may be claimed on the employer’s 2011 income tax return.Review your 2010 new hires to determine eligibility. If the payroll tax waiver was overlooked, you can file an amended payroll tax return to recover overpaid 2010 payroll taxes, in addition to claiming the $1,000 tax credit for 2011. IRS Form 5884-B will be used to claim the credit in your 2011 tax return.
Individual tax matters
Extension of payroll tax cut for 2012 … maybe
During 2011, Congress provided a 2 percent rate reduction in Social Security payroll taxes for employees and those who are self-employed, to help spur consumer spending in a down economy. On December 17, 2011, the Senate passed a 60-day extension of that waiver for the first months of 2012, while the House had voted for a 12 month extension. According to Biebl, this impasse does not look like it will be resolved (the key differences are about how to pay for the full extension).If no last minute deal occurs, employees will go back to the normal 7.65 percent FICA payroll tax withholding in 2012 (rather than 5.65 percent during 2011), and self-employed individuals, who pay both the employer and employee halves of Social Security taxes, will incur the full 15.3 percent rate.
Charitable distributions from IRAs
For those who have attained age 70½, the tax law continues to allow charitable contributions of up to $100,000 annually from an individual retirement account (IRA). Each donation must be transferred directly from the IRA to the charity. This disbursement is excluded from the IRA owner’s income, and also counts toward the annual required minimum distribution that must be drawn from the IRA.Charitable contribution documentation
Many taxpayers finalize their charitable giving in the last days of December by issuing larger year-end checks and credit card charges. But pay attention to the documentation rules. For any single contribution of $250 or more, you must have a written acknowledgement from the charity in hand before filing your tax return. Further, that receipt must contain a notation indicating that no goods or services were provided by the charity in exchange for the contribution.The IRS will disallow legitimate charitable contributions if the taxpayer is not able to produce a properly dated and documented receipt. Also, be cautious of large donations of personal goods and other assets to charity (other than publicly traded stock). If the total exceeds $5,000, an independent appraisal is required.
Timing of itemized deductions
Individuals who itemize deductions should consider prepaying expenses that generate deductions, such as state income taxes, real estate taxes, and charitable contributions. Some of these prepayments, income and personal real estate taxes for example, are ineffective if the alternative minimum tax (AMT) is in play. Your tax advisor can assist you in making that determination.Business losses of individuals
If you own an interest in a partnership or S corporation, you may need to increase your investment in the entity in order to deduct a loss for 2011. Also, if personal participation in the business is less than 500 hours per year, you should discuss strategies for dealing with the passive loss restrictions with your tax advisor.Gift and estate taxes
By using the annual gift tax exclusion before year-end, anyone may give up to $13,000 to an unlimited number of individuals to reduce the costs of a future federal estate tax to heirs. This annual exclusion remains at $13,000 for 2012 as well. The per-person cumulative gift and estate exemption is $5 million. For those with a net worth over this exemption amount, gift planning and other estate reduction strategies remain important.Lock in low IRS interest rates
If you are looking to reduce a potentially taxable estate or transfer an asset or business to heirs, today’s low IRS-approved interest rates present an opportunity. Seller-financed sales can be locked in place using today’s rates (less than 3 percent on long-term notes). And there are strategies that can mix gift and charitable transactions to leverage your ability to pass assets to the next generation.How we can help
These are only a few of the year-end steps that may affect your taxes. Talk to your tax advisor to determine how these rules impact your situation.
View our tax principals.