2011 TAX NEWSLETTER

• Bonus Depreciation. For tax year 2011, the maximum federal deduction of qualifying property that can be expensed in the year of service is $500,000, not to exceed taxable income and reduced dollar for dollar if the cost of property placed in service during the year exceeds $2,000,000. The limits will revert to $139,000/$560,000 beginning 1/1/2012 without a tax law change. The $250,000 qualified leasehold improvement property, restaurant property and retail improvement property eligibility for the § 179 deduction expired 12/31/10.
• Bonus Depreciation. The new act extended the bonus of 100% deduction for qualifying new property (recovery period of 20 years or less) for property placed in service after September 8, 2010 through December 31, 2012 for federal returns only, Ky does not allow bonus deduction.
• Earned Income Credit. Tax preparers and tax clients who file returns without due diligence and prepare the return using incorrect or false information to claim the Earned Income Credit will be subject to penalties of $100 to $5,000.
• Energy Tax Incentives. In 2011, there is a 10% credit for the cost of energy-efficient improvements to your existing home for insulation, skylights, outside doors, metal and asphalt roofs, water heaters and heating and air conditioning systems. The maximum lifetime credit for all years is reduced to $500 for items installed in your primary home and $200 for windows. Homeowners who install solar, geothermal, fuel cell and wind energy systems used to heat air or water still can claim a 30% credit for the cost of equipment placed in service from 2009-2016. Certain hybrid gas, diesel, battery-electric and fuel cell vehicles may still be eligible for tax credits. A plug-in electric vehicle credit, ranging from $2,500 to $7,500, applies to certified vehicles purchased or placed in service on or after February 17, 2009. Kentucky has enacted an energy efficient homes credit and energy efficient products credit available 2009-2016.
• Health Insurance Credit. The § 45R credit is generally available to small employers that pay at least half the cost of health insurance premiums. From 1/1/10-12/31/13, the maximum credit is 35% of premiums paid by eligible employers with 10 or fewer full time employees. The credit is completely phased out for an employer with more than 25 full time employees or with average wages of more than $50,000. We will need information on the premiums paid per employee and total for year, total number of hours and total wages paid each employee worked in 2011, identify any family member employees, seasonal workers(less than 120 days), and 2% S-corp and 5% other owners to determine if your business is eligible to claim the credit.
• Making Work Pay Credit. The credit was replaced with a 2% employee payroll tax cut. Effective 1/1/11 the employee share of Social Security was reduced from 6.2% to 4.2% and the self employed will pay 10.4% down from 12.4% of OASDI. The Medicare portion of 2.9 %( 1.45% employee/employer each) remains the same. Congress has not extended this payroll tax cut as of the date of printing.
• Over-the-Counter Drugs. Effective January 1, 2011, the cost of nonprescription drugs will no longer be a qualifying expense for health plan reimbursements and withdrawals from health savings accounts. Exception: Insulin continues to qualify.
• Retained Worker Credit. Employers that hired certain unemployed individuals after 3/18/10 and retained that worker for 52 consecutive weeks may be eligible for a tax credit of the lesser of $1,000 or 6.2% of wages during the 52 week period. The wages paid during the last 26 weeks must equal at least 80% of wages paid in first 26 weeks.
• Simple Cafeteria Plan. Beginning January 1, 2011, small employers (average 100 or fewer) are eligible to establish simple cafeteria plans, which provide a safe harbor from some nondiscrimination requirements to provide qualified benefits on behalf of each qualified employee who had at least 1,000 hours of service.

Annual Updates

• Adoption Credit. The maximum adoption credit allowed in 2011 is the amount of adoption expenses up to $13,360. The adoption credit begins to phase out for taxpayers with modified adjusted gross income in excess of $185,210 to $225,210. The credit is refundable in 2011 but will not be in 2012.
• Alternative Minimum Tax. The AMT is a parallel tax system directed at taxpayers who pay too little regular income tax because of the use of certain deductions, credits and tax preferences. The AMT tax rates are 26% on AMT income of up to $175,000 and 28% on AMT income above $175,000. The AMT exemption amount was increased to $74,450 for married couples filing jointly and surviving spouses, $48,450 for single and head of household taxpayers and $37,225 for married couples filing separately. Nonrefundable personal credits may be applied to AMT tax.
• Automobile Depreciation. 2011 passenger auto depreciation is $3,060; light trucks and vans is $3,260. However, if the auto, truck or van is new, the additional first year deduction is increased to $11,060 for autos and $11,260 for trucks and vans weighing 6,000 lbs or less. Heavier luxury sports utility vehicles between 6,000 and 14,000 pounds have a section 179 limit of $25,000, with any excess depreciated using MACRS and bonus depreciation rules.
• Business Insurance. Minimum coverage for small businesses should include vehicle damage or loss, fire, liability and workers' compensation.
• Capital Gains and Losses. For capital assets held more than one year, the top tax rate on net capital gains remains at 15%. However, for those in the lower 10% or 15% income tax brackets the rate is 0% through 2012. With proper planning some taxpayers could generate income, implement various asset management strategies or satisfy gift and income shifting objectives at no tax cost. Collectibles or realty, up to the amount of prior allowable depreciation, are taxed at 28% and 25%, respectively. The IRS now says that an office located within the home does not have to be treated as business property when the residence is sold. If you qualify for the capital gain exclusion on sale of a residence ($250,000 for single and $500,000 for joint filers), only capital gain up to the amount of allowable depreciation would be taxable at a maximum rate of 25%. Capital losses are fully deductible against capital gains with any excess deductible against ordinary income of up to $3,000 per year.
• Charitable Contributions. Cash donations will no longer be deductible without a receipt from the charity showing its name, date and amount of contribution or a canceled check, bank record or pay stub showing date and name of the charity. A receipt is needed for donations of clothing and household goods and will only be allowed for items in good used condition. The charitable deduction for a vehicle is generally limited to the proceeds from the vehicle resale by the charity.
• Charitable IRA Distributions. Extended through 12/31/11, up to $100,000 per year of qualified IRA distributions made directly to an IRA trustee of a qualified charitable organization by an IRA owner who is 70 ½ years old will be tax free. A charitable deduction may be available for the basis reduction.
• Child or Dependent Care Credit. The enhanced credit based on income is available through 2012 for 20% - 35% of your eligible employment-related child or dependent care expenses to a maximum of $3,000 for one dependent or $6,000 for two or more dependents if not already deducted by an employer in a cafeteria plan.
• Child Tax Credit. The tax credit for each dependent child under age 17 is $1,000. The child tax credit begins to be phased out on tax returns with modified adjusted gross income in excess of $110,000 for married filing joint taxpayers, $75,000 for single or head of household filers, and $55,000 for married taxpayers filing separate returns. The law also makes the child tax credit refundable to the extent of 15% of the taxpayer’s earned income in excess of $3,000 and extends the credit through 2012.
• City of Lebanon Occupational License Tax. Ordinance No. 07-17 requires every business to obtain a license, file an annual license fee return and withhold on gross wages before deduction for pension, profit sharing or other salary reduction agreement and file returns accordingly.
• Combat Zone and Armed Forces. There are several exclusions and credits related to combat pay for individuals serving in the armed forces in a combat zone. In addition, there are provisions for extensions for filing returns and paying taxes and licenses.
• Coverdell Education Savings Accounts. Extended through 2012, an education savings account is a trust created exclusively for the purpose of paying the qualified higher education expenses of a designated beneficiary if certain requirements are met. A contribution of up to $2,000 per child is available for joint filers with $190,000-$220,000 of AGI, and single filers with $95,000-$110,000. (Any contributions to an Educational Savings Account do not affect the ability to contribute to a Traditional or Roth IRA.) Contributions may be made as late as April 15 of the following year. Tax-free withdrawals may be used to pay for qualifying costs not only at college but also at any level of education from kindergarten through graduate school. Covered expenses include tuition, fees, room, board, books, computer equipment, and uniforms.
• Domestic Production Activity Deduction. Certain taxpayers that report income from lease, rental, license, sale, exchange or other disposition of qualifying production property that is manufactured, produced, grown or extracted by the taxpayer within the U. S. may be eligible to receive a maximum 9% of taxable income as a deduction on their Form 1040 up to 50% of W-2 production wages. Kentucky retained the 6% DPAD deduction.
• Education Credit. For tax years 2010-2012, if you, your spouse or dependent incur qualified tuition and course materials expenses for post-secondary education, you may be able to claim an American Opportunity Credit (now available all four years) with a maximum credit of $2,500 per year. Eligibility for the credit is phased out as AGI increases from $160,000 to $180,000 (married filing joint) and $80,000 to $90,000 (single & head of household). Up to 40% of the new credit is refundable if taxpayer is not subject to the kiddie tax. Eligible expenses now include tuition, fees and course materials.
• Educator Deduction. Congress extended the $250 deduction for tax years 2010 and 2011.
• Electronic Filing. The IRS e-file program has many benefits for taxpayers and is mandatory for firms preparers filing 100 or more returns. Tax refunds are received in half the time compared to paper filing and are received even faster with direct deposit. The IRS e-file computer system quickly checks for errors and omissions, thereby reducing the likelihood that a taxpayer will receive an error notice from the IRS. IRS e-file provides a proof of receipt within 48 hours to confirm that a tax return has been accepted. Taxpayers with a balance due may also choose to e-file early and schedule a payment for a future date. Please advise us when you bring in your information if you want direct deposit so we can check routing and account numbers.
• Electronic Payment. The Internal Revenue Service (IRS) is now letting individuals pay their federal tax and their estimated tax payments via its Electronic Federal Tax Payment System (EFTPS) over the internet. Millions of businesses already use EFTPS to make payroll tax deposits over the Internet. Sign up by filling out an enrollment form at the EFTPS Web site, www.eftps.gov. You will get a personal identification number (PIN) from the IRS in approximately 15 days with instructions on how to obtain an Internet password. Armed with your PIN and password, you can then send payment instructions to the IRS over the Internet, and EFTPS will automatically debit your bank account. Payment instructions must be initiated at least one day before they are due, but can be scheduled up to one year in advance.
• E-Mail. Our tax software will allow us to e-mail your tax return to you electronically for review if you provide us your e-mail address. You will need Adobe Acrobat Reader 5.0, or higher, for this option to work.
• Estate Planning. In 2011, the unified estate and gift tax exclusion is $5,000,000 with a maximum 35% rate and stepped up basis. A deceased spouse can transfer their unused exclusion amount by filing a Form 706. The surviving spouse puts the transfer amount with their $5 million exemption for taxable transfers during life. For 2012, the unified estate and gift tax exemption is $5,120,000. Don’t Drop Plans or Protection—Be careful about changing estate plans already made or dropping insurance coverage designed to pay estate taxes. Count on estate planning complexity to continue for the next decade. People who assume their estate will owe no tax, because of the increasing Unified Credit Exemption Equivalent, may leave heirs vulnerable to new estate tax rules Congress may create in the future. If insurance coverage is canceled, there is no guarantee that it can be replaced at the same rates in the future.
• Estimated Tax Payment. The 4th quarter payment is due January 16, 2012. For 2011, an underpayment penalty may be assessed if you have not paid in estimated tax payments equal to 90% of the tax liability on the prior years return. Also, if you itemize deductions for federal purposes and are required to make Kentucky estimated payments, it is recommended that you make your Kentucky 4th quarter estimate before December 31, 2011.
• Exemption Amount. Personal and dependent exemption amounts are $3,700 in 2011. Significant changes in the definition of a qualifying child occurred after 2008. There is no adjusted gross income phase-out through December 31, 2012 for higher-income taxpayers.
• Farm Disaster Assistance. If you sold more livestock than you normally would during the year because of drought, flood, or other weather-related conditions, you can include the income from selling the additional livestock in next year’s income. To qualify, the weather-related condition must result in an area designated as eligible for assistance by the federal government. The livestock does not have to be raised or sold in the disaster area, but the sale must occur solely because of weather-related conditions that affect the water, grazing, or other requirements of the livestock. Disaster payments, insurance or federal assistance money, received as a result of crop damage or destruction is generally taxable in the year received. You may, however, be eligible to elect to defer such payments until next year’s tax return by showing that income from the damaged crops would have been reported in the next year or later.
• First Time Homebuyer Tax Credit. For homes purchased after April 8, 2008 and before July 1, 2009, the maximum credit was $7,500 and works like an interest-free loan that must be repaid beginning 2 years after the year of purchase (2010 tax return) over a 15-year period.
• Form 1099 Reporting Requirements. Payments made to individuals in the course of a trade or business must be reported to the payee and IRS on Form 1099-MISC if the payments exceed $600 for the year. There was a proposed change to add payments to corporations and also payments for property but that provision was repealed. The penalty for failure to file increases from $30 to $250 per failure with maximum penalties up to $1,500,000. The recipient form needs to be completed and mailed by January 31, 2012.
• Gift Exclusion. The annual gift tax exclusion is $13,000 in 2011 and 2012. For gifts after 2010, the annual gift tax exclusion is $13,000 and the gift tax is unified with estate tax with a 35% rate and a maximum applicable exclusion of $5,000,000 in 2011 and $5,120,000 in 2012.
• Health Savings Account. A health savings account (HSA) is a tax-exempt trust or custodial account that you set up any time during the year with a U.S. financial institution which allows you to pay or be reimbursed for certain medical expenses. This account must be used in conjunction with a high deductible health plan (HDHP).Tax-favored HSAs can be established by eligible individuals who are covered by a high deductible health plan and not covered by any other health plan. For 2011, a health plan with deductibles of $1,200-individual and $2,400-family, with out of pocket limits of $5,950- individual and $11,900-family is a high deductible plan. For 2011, if you have self-only coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $3,050. If you have family coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $6150 ($1000 addition if you 55 or older). The HSA can be established using a qualified trustee or custodian that is different from the HDHP provider. Contributions to an HSA must be made in cash or through a cafeteria plan. You may enjoy several benefits from having an HSA. You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040.Contributions made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income. The contributions remain in your account from year to year until you use them.The interest or other earnings on the assets in the account are tax-free. Distributions aren’t taxed if you pay qualified medical expenses.
• Health Coverage. Effective March 31, 2010, Health insurance plans that cover dependent children are required to make coverage available for adult children under age 27 and the coverage is now generally tax-free to the employee.
• Interest on Higher Education Loans Deduction. Interest you pay on education loans used to pay tuition, room and board and other related educational costs can be deducted up to a limit of $2,500 for 2010-2012. The income limits to claim the deduction are $120,000 - $150,000 for joint filers and $60,000 - $75,000 for single filers. The interest deduction may be taken directly from gross income.
• IRA Conversions. Conversion from an IRA to a ROTH IRA can be made at any time. The 10% tax on early withdrawal does not apply to the conversion. However, if you withdraw these funds from the ROTH within the five-year period beginning with the year of conversion then that withdrawal is subject to a 10% penalty. In 2011, there is a $100,000 income limit on conversion. In 2010, there was no $100,000 AGI limit on converting traditional IRAs to Roth IRAs and tax on those conversions occurring in 2010 could be spread evenly over a two-year period in tax year 2011 and 2012 or all paid in 2010.
• IRA Provisions. The total amount you may contribute to a deductible IRA plan is $5,000 in 2011. The “catch-up” provision for taxpayers over age 50 is $1,000. Contributions for a tax year must be made before the tax filing deadline-no extensions. The adjusted gross income phase-out for traditional IRAs for taxpayers who are active participants in a pension plan is $56,000 - $66,000 for single filers; $90,000 - $110,000 for joint filers; and $0 - $10,000 for married filing separately. For 2011, if you are not covered by a retirement plan, but you either live with or file a joint return with a spouse who is covered, then your IRA deduction is phased out if your AGI is more than $169,000, but less than $179,000. If your AGI is more than $179,000, you cannot take a deduction for contributions to a traditional IRA. The minimum distribution options for an inherited IRA vary and depend on whether the owner died before or after the required beginning date for distributions. A spouse can roll the inherited IRA into their own IRA account or elect to be treated as a beneficiary. A non-spouse beneficiary must take required minimum distributions determined under IRS rules.
• Itemized Deduction Limitations. There is no adjusted gross income phase-out through December 31, 2012.
• Kentucky Limited Liability Entity Tax. Limited liability pass-through entities will be subject to the Limited Liability Entity Tax (LLET) imposed by KRS 141.0401 (2). Each separate “corporate entity” will pay the greater of corporate income tax, alternative minimum calculation tax (based on gross receipts or gross profits if greater than $3,000,000) or $175. All other “corporate entities” will now report their distributive share income on their individual tax returns after December 31, 2006 and pay tax at the individual level.
• Kentucky Pension Exclusion. Kentucky's pension exclusion from income tax remains at $41,110.
• Kiddie Tax. Any unearned income above $1,900 of a child under 19 and full time students under age 24 will be taxed at the top rate of the parent unless the child provides more than one-half of own support with earned income.
• Lifetime Learning Credit. If you, your spouse or dependent incur qualified tuition and required fees for post-secondary education, you may be able to claim a Lifetime Learning Credit-maximum credit of $2,000 per taxpayer return. Eligibility for the credits is phased out as AGI increases from $100,000 to $120,000 (married filing joint) and $50,000 to $60,000 (single & head of household).
• Mileage Rate Allowances. The standard mileage rate allowed for business use of a car is 51¢ per mile for January-June, 2011 and 55.5¢ per mile for July -December 2011. This rate is used to calculate the tax deduction for business travel for up to four vehicles as an alternative to deducting actual costs of maintaining an automobile. The charitable mileage rate is 14¢ per mile for 2011 and medical and moving rates are 19¢ for January-June, 2011 and 23.5¢ for July - December 2011.
• Mortgage Debt Forgiveness. You may qualify to exclude from federal gross income, debt forgiveness on your principal residence (does not apply to vacation homes, rental or business property, credit cards or auto loans) from 2007-2012.
• National Guard/Reserve Travel. Members of National Guard and Reserve units traveling at least 100 miles away from home and overnight may deduct their travel expenses. Federal and Kentucky both treat this as a deduction from Adjusted Gross Income. Kentucky excludes all military pay of active duty members of the Armed Forces starting with the 2011 tax return.
• Net Operating Loss Carryback. A net operating loss may be carried back 2 years and forward 20 years. Kentucky only allows carryforward for 20 years.
• Private Mortgage Insurance Deduction. Homeowners with low down payment loans will be able to deduct the cost of their mortgage insurance premiums on mortgage insurance contracts issued after 1/1/ 2007 if adjusted gross income is $100,000 or less (or $50,000 if you are married and filing separately). The deduction is reduced for adjusted gross incomes between $100,000 and $110,000 and phases out completely if your adjusted gross income is $110,000 or more. The PMI deduction is set to expire at the end of 2011.
• Property Tax Homestead Exemption. Any persons who are 65 years of age or totally disabled who own real property used as their permanent residence qualify for a homestead exemption of $34,000 for 2011 against their property tax bill. Application with the county property valuation administrator where the applicant resides can be made in the year the resident turns 65 or becomes totally disabled. Only one application need be filed and only one exemption per residential unit is allowed. Any person making application and qualifying for the homestead exemption after property tax bills have been paid shall be entitled to a refund of property taxes paid in excess of the amount applicable to the value of the homestead exemption.
• Qualified Tuition Plans (529 Plans). Qualified Tuition Plans (Section 529 Plans) are tax-advantaged programs authorized for state, state-sponsored and private institutions. Contributions to Section 529 plans are made on an after-tax basis for federal tax purposes and some states allow deductions against state income taxes. Distributions made to a designated beneficiary are excluded from taxable income. Tax-free distributions can be taken against a variety of education expenses, including tuition, fees, books, supplies and the costs of supporting a special-needs student. New for 2009 and 2010, expenses for computer technology and equipment and internet access and related fees if necessary are also allowable distributions. It’s important to note hat penalties can apply at both the state and federal level on withdrawals that are not made for qualified education expenses and these withdrawals also are fully taxable. The major tax advantages of the 529 Plans are: a) Qualified withdrawals will be exempt from Federal and Kentucky Income Tax; b) No income earnings limits apply to Qualified Tuition Plans; and c) There are no annual limits on amounts that may be contributed to Qualified Tuition Plans. Each state has different contribution limits. In Kentucky, the limit is $100,000 per beneficiary; however, there may be a gift tax return due for excess contributions.
• Rates. The tax brackets for 2010-2012 are:



Rate	Single	Head of Household	Married Filing Joint/Surviving Spouse	Married Filing Separate
10%	$0 - 8,500	$0 - 12,150	$0 - 17,000	$0 - 8,500
15%	$8,501 - 34,500	$12,151 - 46,250	$17,001 - 69,000	$8,501 - 34,500
25%	$34,501 - 83,600	$46,251 - 119,400	$69,001 - 139,350	$34,501 - 69,675
28%	$83,601 - 174,400	$119,401 - 193,350	$139,351 - 212,300	$69,676 - 106,150
33%	$174,401 - 379,150	$193,351 - 379,150	$212,301 - 379,150	$106,151 - 189,575
35%	OVER $379,150	OVER $379,150	OVER $379,150	OVER $189,575



• Required Minimum Distribution.Traditional IRA required minimum distributions returned in 2010 and generally begin by April 1 of the year following attainment of age 70 ½. If you are 70 ½ or older and are required to take a distribution from your traditional, SEP or SIMPLE IRA the last day to do so is December 31. Meeting the deadline is important because the IRS may assess a 50% penalty on any amount not distributed as required.
• Retirement Plan Contributions Listed below are the 2011 and 2012 contribution limits for qualified plans and the “catch-up” provisions for taxpayers over age 50. The limit for defined contribution plans cannot exceed 100% of compensation. The maximum compensation allowed for the calculation is $245,000 ($250,000 in 2012). The maximum deduction for employer contributions is 25% of all participants' compensation. A self-employed individual may contribute up to the lesser of 25% of net earnings (less ½ social security and retirement contribution) from the trade or business or $49,000 ($50,000 in 2012). The salary dollars you contribute are not subject to Federal or State income tax until you receive a distribution from the plan and your contributions are invested on a tax-deferred basis. Employer contributions for a tax year must be made before the tax filing deadline including extensions.




Year	401(k), 403(b) & SAR-SEP	Over age 50	SIMPLE IRA Plan	Over Age 50	Defined Contribution Plan
2011	$16,500	$22,000	$11,500	$14,000	$49,000
2012	$17,000	$22,500	$11,500	$14,000	$50,000



• ROTH IRA. Contributions made to a Roth IRA are not tax deductible. The major benefits of Roth IRAs are that earnings from investments are tax-free, there is no 70 1/2 age limit on making contributions; individuals of any age with compensation are eligible to contribute to a Roth IRA and there are no minimum distribution requirements for withdrawal during the owner’s lifetime. The total amount you may contribute to a Roth IRA plan is $5,000 for 2011. The “catch-up” provision for taxpayers over age 50 is $1,000. Your ROTH IRA contribution is phased out if your adjusted gross income in 2011 is $107,000 - $122,000 for single filers; $169,000 - $179,000 for joint filers; and $0 - $10,000 for married filing separately. A Roth IRA can be established at any time during the year but contributions for a tax year must be made before the owner’s tax filing deadline (not including extensions).
• Saver's Tax Credit. A maximum $1,000 tax credit will be available to individuals who put their own money into retirement plans and have AGI of $56,500 or less for joint filers, $42,375 or less for head of household or $28,750 or less for single filers. The percentage is 10%, 20% or 50% of qualified contributions based on AGI and filing status. The taxpayer must be at least 18 years old, not a full time student and not claimed as a dependent on another’s tax return. Example: A single filer contributes $2,000 to a Roth IRA and has AGI of $20,000. The credit will be calculated as 10% of $2,000 ($200). Since the credit reduces taxes dollar for dollar, this will be like getting a $200 “matching contribution” from the government.
• Section 179 Deduction. The 2010 Small Business act increased the Federal annual expense limit to $500,000 for qualified depreciable property purchased and placed in service in 2011. The deduction is limited to the taxable income from the trade or business and is reduced dollar-for-dollar as asset acquisitions exceed $2,000,000. For 2011, up to $250,000 of the $500,000 can be spent for certain qualified real property. Heavier luxury sports utility vehicles between 6,000 and 14,000 pounds have a section 179 limit of $25,000. Kentucky’s annual maximum dollar limit for Section 179 is $25,000 for tax year 2011. The Kentucky deduction is limited to the taxable income from the trade or business and is reduced dollar-for-dollar as asset acquisitions exceed $200,000.
• Self-employed Health Insurance Deduction. Self-employed taxpayers can deduct 100% of their health insurance premiums (not in a pre-tax cafeteria plan) as an adjustment to income on their Federal and Kentucky returns. The deduction of SE health insurance in calculating self employment tax expired 12/31/10.
• Small Company Retirement Plans. Small companies with 100 or fewer employees may take a tax credit of up to $500 against qualified plan expenses in each of the first three years after starting a new plan. The law simplifies the “top-heavy rules” which subject many small companies to complex requirements while making compliance with these rules more manageable.
• Social Security. For 2011, the FICA tax rates were 7.65% for employers but only 5.65% for employees and the maximum FICA Wage Base was $106,800 for 2011 and $110,100 in 2012. Social Security recipients under full retirement age have an earnings limit of $14,160 for 2011 and $14,640 for 2012. The earnings test for an individual reaching full retirement age is $37,680 in 2011. Those over full retirement age (65-67yrs) can continue to earn unlimited amounts without reduction in Social Security benefits. Wage earners and self-employed individuals earn one-quarter credit for each $1,120 in 2011, for up to four quarters per year. The optional method for SE tax has been increased to allow taxpayers to earn four quarters of coverage. If your AGI is above $32,000 to $44,000 for married filing joint or $25,000 to $34,000 for single filers then 50% to 85% of your Social Security benefits may be taxable.
• Standard Deduction. For 2011, the federal standard deduction(for those who don’t itemize deductions) is $5,800 for single filers or married filing separate filers, $11,600 for married filing joint or qualifying widow, and $8,500 for head of household filers. You are entitled to an additional standard deduction of $1,150 for each married individual or $1,450 for single individuals if you are blind or 65 years of age or older. The standard deduction for dependent children is the greater of $950 or $300 plus earned income of the dependent up to $5,800. The Kentucky standard deduction is $2,240 in 2011.
• Start-up Expenses. Beginning, 1/1/11, $5,000 of start-up costs can be deducted with the remainder amortized over 180 months. For 2010 only, $10,000 (with a phase-out over $60,000) of start up expenses of a new trade or business was allowed to be deducted.
• State and Local Sales Tax. Extended through 2011, taxpayers choose between deducting state and local income taxes or state and local sales taxes. There will be two options for determining the sales tax deduction; (1) accumulating receipts; or (2) using IRS sales tax tables and adding actual sales taxes paid for major items, such as vehicles, boats, etc. Please advise us of any purchases of out of state tangible personal property you made for use in Kentucky on which sales tax was not charged (i.e., catalog and internet purchases or magazine subscriptions). KRS 139.330 requires reporting on at least an annual basis at 6% of total out of state purchases.
• Tax Preparer Penalties. New rules for paid tax-return preparers are expected this year as the IRS seeks to increase taxpayer compliance. We will be asked to be more diligent in compliance, record management, questionable positions, and filing responsibilities. There will be significant penalties for non-compliance. We will be asking our clients to complete engagement letters, sign consent to use or release information forms, bring in more documentation to support deductions and retaining more records to support positions in case of review or audit. The EITC due diligence penalty is jumping from $100 to $500 on returns filed after December 31, 2011.
• Tuition Deduction. Congress renewed the $4,000 in tuition costs deduction against taxable income for tax years 2010 and 2011 if Adjusted Gross Income does not exceed $80,000 for single or $160,000 for joint filers.
• Work Opportunity Credit. Hiring of certain targeted employment groups that are certified by a designated local agency qualify the employer for a employer tax credit of 40% of up to $6,000 of first year wages (maximum $2,400 per employee) and was extended through December 31, 2011..
• W-2 Reporting. Only employers with more than 250 employee W-2's are required to report health insurance costs (both employee and employer share) until further notice. It does not mean that your employer-provided health care coverage is now subject to tax.

THE FOLLOWING WARNING IS REQUIRED BY THE IRS WHENEVER TAX ADVICE IS GIVEN:

Phone: (270)-692-3141 or (800)-587-1761 | Fax: (270)-692-6693
Email: sh@spragenshigdonlaw.com

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