Once again tax time is here.  Unfortunately, it also means there will be increased threats of tax-related virus and 'phishing' activity by computer hackers.  Recently, several DDK clients have reported receiving the following email, which really is a newly-scripted TROJAN virus posing as a valid message from the IRS.  If you receive this message, do not open it or click on the link.  For your reference it reads:

From: "Internal Revenue Service"<update@irs.gov.us>
Date:  Jan 2011
Subject:  Important: W-2 form update

PLEASE REMEMBER THAT THE IRS NEVER REQUESTS INFORMATION VIA E-MAIL, so please do not open the message or click on the link.
 

The IRS recently released Publication 15 (Circular E), Employer's Tax Guide for use in 2011, which reflects changes made by the 2010 Tax Relief Act and explains when employers should put the change into effect.

Employers are advised to: (1) implement the 2011 withholding tables (Released in late December 2010 - Notice 1036) as soon as possible, but no later than Jan, 31, 2011; and (2) use the 2010 withholding tables until they implement the 2011 withholding tables.

The new payroll tax holiday also affects the situation.  The 2010 Tax Relief Act reduces the employee OASDI tax rate under the FICA tax by two percentage points to 4.2%.  For self-employment income for tax years beginning in 2011, the OASDI tax rate under the SECA tax is reduced by two percentage points to 10.4% percent.  Because of these changes, employees will pay only 4.2% Social Security tax on wages up to $106,800 (self-employed persons will pay 10.4% Social Security self-employment taxes on self-employment income of $106,800), for 2011.

The IRS advises employers to implement the 4.2% employee Social Security tax rate as soon as possible, but not later than Jan. 31, 2011.  After implementing the new 4.2% rate, employers are told to make an offsetting adjustment in a subsequent pay period to correct any Social Security tax over-withholding as soon as possible, but not later than Mar. 31, 2011.

The FUTA tax rate will remain at 6.2% through June 30, 2011.  The FUTA tax rate is scheduled to decrease to 6.0% beginning July 1, 2011, absent further Congressional action.

Starting January 1, 2011, employers must use electronic fund transfer (EFT) to make all federal tax deposits, such as deposits to employment tax, excise tax, and corporate income tax.  Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be used after Dec. 31, 2010.

A.  Employees and Self-Employed

For 2011 only, the 2010 Tax Relief Act reduces the employee portion of the Social Security tax on earned income down to 4.2% from 6.2%.  Self-employed people pay both the employee and employer portions of Social Security tax, and the 2010 Tax Relief Act also reduces their rate by two percentage points for 2011, to 10.4% down from 12.4%.  For self-employed individuals, this does not reduce their deduction for the employer's share of these taxes.

In 2011, the maximum taxable wage base for Social Security taxes is $106,800.  So the maximum tax savings from this break is $2,136.  Unlike last year's Making Work Pay credit (which payroll tax break essentially replaces), no other income-based limit applies.  This means even high-income taxpayers can enjoy the maximum benefit.

B.  Alternative Minimum Tax (AMT)

With the passage of 2010 Tax Relief Act, the top regular income tax rate on ordinary income remains at 35% through 2012.  The top AMT rate is only 28%, but it usually applies to higher taxable income base.  This can result in unpleasant tax surprises if you plan only for regular income taxes.  Also, income-based phase outs and other limits can increase your marginal rate for regular-tax or AMT purposes.

Because of these 'moving parts' it is important to review your income, expenses and potential tax liability throughout the year.  Only then can you time income and expenses to your advantage.

Before you take action to time income or expenses, determine whether you're already likely to be subject to the AMT - or whether the actions you're considering might trigger it.  Many deductions used to calculate regular tax aren't allowed under the AMT and thus can trigger AMT liability.  Some income items also might trigger or increase AMT liability.

With proper planning, you may be able to avoid the AMT, or at least reduce its impact - and perhaps take advantage of its lower maximum rate.  The first step is to work with your DDK professional to determine whether you could be subject to the AMT this year.  Consider accelerating income and short capital gain into the current year, which may allow you to benefit from the lower maximum AMT rate.  Also consider deferring expenses you can't deduct for AMT purposes until next year - you may be able to preserve those deductions.  Additionally, if you defer expenses you can deduct for AMT purposes to next year, the deductions may become more valuable because of the higher maximum regular tax rate.  Finally, consider the tax consequences of exercising ISOs.

The New York State sales tax exemption for clothing and footwear items costing less than $110 has been suspended during the period from October 1, 2010 through March 31, 2011.  From April 1, 2011 through March 31, 2012, clothing and footwear items selling for less than $55 will be exempt.  Beginning April 1, 2012, the under-$110 exemption will be restored.  For City's sales tax purposes, the current under-$110 exemption will continue until March 31, 2011.  Beginning April 1, 2011, the City is authorized to conform to the State under-$55 exemption, repeal the exemption entirely or continue the under-$110 exemption.  Beginning April 1, 2012, the City exemption will conform to the State under-$110 exemption unless the City elects to repeal the exemption.

DDK can help your company obtain the maximum advantage from these tax law changes.  Please do not hesitate to contact us for assistance.
 

 DDK TAX TEAM
 

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Accountant Joke

Accountant after reading nursery rhymes to his young child. " No, son. When little Bo Peep lost her sheep that wouldn't be tax deductible, but I like your thinking".