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Brian T. Whitlock, CPA, JD, LLM

Tax Partner

2011 Individual Income TaxesTips and “Taps”

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Topics

Overview A few New things Lots of expiring provisions in 2012

Federal Changes for 2011 Expanded 1099-B reporting Loss of some Tax Credits Payroll Tax Cut Extended Unemployment benefits Foreign Asset Reporting

State of Illinois Tax Increase – from 3% to 5%

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Some IRS Form 1099 Rules - Changes

Good news - IRS Form 1099-MISC only needs to be issued for Services rendered by non-corporations if total is more than $600

If you operate a business get IRS Form W-9 for each Vendor Vendor will check box on Type of Entity

Good news - Landlords and Lessors of Real Property are not in “Trade or Business” therefore they do not need to issue IRS Form 1099-MISC to service providers

Bad news - Penalty Increases for failure to file 1099s $100 for each omitted 1099 $250 for each – if intentionally disregarded Rules Maximum penalty $1.5 million per taxpayer

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IRS Form W-9

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New IRS Form 1099 Rules

IRS Form 1099-B Stock Brokers must report Basis on Stock Acquired after

January 1, 2011 (at time of sale)—Deadline for brokers postponed until Feb 29th

—Look for delays in receiving 1099’s

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IRS Form 1099-B

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New IRS Form 1099 Rules

IRS Form 1099-B Stock Brokers must report Basis on Stock Acquired after

January 1, 2011 (at time of sale)—Deadline for brokers postponed until Feb 29th

—Look for delays in receiving 1099’s New IRS Form 8949 must be filed in addition to Schedule D

—One form will report 1099-B Stock sales with reported basis—A Second form will report 1099-B sales w/o reported basis—A Third will report sales not reported on 1099-B—Separate Schedule of Short-Term and Long-Term (6 possible)

IRS intends to track and match taxpayer reports to 1099’s Watch for IRS notices for not reporting on separate 8949

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IRS Form 8949

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IRS Form 8949

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New IRS Form 1099 Rules

IRS Form 1099-K (NEW) Filed by “Payment Settlement Agents” (PSE)

—Debit Cards, Credit Cards, E-Bay and Pay Pal If you are in a trade or business (file either Schedule C, E, or F)

—Show 1099-K revenue on separate line [IRS will track and match] If you are selling personal collectibles (file Sch D and Form

8949) Top Capital Gains Tax Rate = 28% Trade or Business (?) [Sole Proprietor = Schedule C]

Regular activity vs. Infrequent sales (1099 has monthly data) Inventory Resale Number and Sales Tax Collection Self employment Tax on Net earnings of Schedule C

Rental [Schedule E] or Farming [Schedule F]

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IRS Form 1099-K

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Form 1040 - Schedule C

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Form 1040 - Schedule E

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Small Business Items

100% Depreciation Expense for 2011 Bonus depreciation for qualifying property No AMT Adjustment

Section 179 for $500,000 of new property placed in service Section 125 “Cafeteria Plan” available to small business

Pre-tax treatment of health care premiums Standard Mileage Deduction

51 cents per business mile January 1, 2011 thru June 30, 2011 55.5 cents per business mile July 1 through December 31, 2011 19 cents per moving mile January 1, 2011 thru June 30, 2011 23.5 cents per business mile July 1 through December 31, 2011 14 cents per charitable mile

100% gain exclusion for sale of small C Corporation (Section 1202)

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Small Business Items

35% Small Business Health Insurance Credit Under 25 employees only appeal to those with wages of $25k-50k

Employee Retention Credit (IRS Form 5884-B) Tax Credit of lesser of $1,000 (or $6.2% of first $16,129 of wages) Hired after 2/3/10 and before 12/31/10 if retained for 52 weeks

Tax Credit for hiring unemployed Veterans Hired after 11/21/2011 and before 2013 Up to $5,620 if out of work over 6 mo. ($2,400 if out over 4 weeks) Up to $9,600 for disabled vet over 6 mo ($4,800 if less than 6 mo)

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Making Work Pay Credit (Schedule M)

$400 Refundable credit for 2009 & 2010

GONE in 2011 Replaced with Payroll Tax reduction If you made more the $20,000 you saved more than $400

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2011 - 2% Payroll Tax Cut Typical Employee Payroll deductions include:

Federal Income Tax State Income Tax (3%) FICA (Social Security) (6.2% employee + 6.2% match)

—On first $106,800 of wages Medicare (1.45% employee + 1.45% employer match)

Employee portion of FICA from 6.2% to 4.2% effective January 1, 2011 through February 29, 2012

For 2011 the maximum benefit was $2,172 (per worker) For 2012 (2/12 of $110,100 or first $18,350 of wages or self

employment income exempt) Example: Josh earns $50,000 in wages during 2011. He will

have 2% less FICA withheld from his check meaning his take home pay will increase by $1,000.

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2011 and 2012 – 2% Illinois Tax Increase

Ones are Wild 1/1/11 + 1 (January 11, 2011 plus 1 AM) Illinois legislature increase individual income tax from 3% to 5% Increases withholding tax 2%

Example: Josh earns $50,000 in wages during 2011, but he lives and works in Illinois. He will have 2% less FICA withheld from his check, but he will have 2% more withheld for the State of Illinois meaning his take home pay will be unchanged.

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IRS Form W-2

Employers to report Health Care Premiums Paid Optional in 2012 for 2011 Forms Mandatory in 2013 for 2012 Forms DD in Box 12a followed by Amount

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IRS Form W-2 – Health Care Premiums (optional ‘11)

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Individual Tax Rates Extended through 2012

Marginal Individual Income Tax Rates (MFJ) (indexed for inflation)—up to $16,750 …………… 10%—$16,750 to 68,000……….15%—$68,000 to 137,300… …..25%—$137,300 to 209,250……28%—$209,250 to 373,650……33%—Over $373,650…………..35%

Kiddie Tax – Parent’s rate over $1,900 of Income Marriage Penalty Reduced (difference in brackets married v single)

—Single brackets are exactly ½ of MFJ Rates Reduced Rate on Dividends and Capital Gains

—15% bracket …………………………………..0%—Dividend and LTCG above 15% bracket ….15%—Real Estate Recapture of Depreciation……25%—Collectibles…………………………………...28%

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Personal Exemptions and Standard Deductions

Personal Exemption - $3,700 per dependent Standard Deduction if you do not itemize

—$5,800 …………… Single and Married Filing Separate—$950……………… .For Dependents on other’s return—$11,600……………Married Filing Joint (MFJ)—$8,500……………..Head of Household (HH)—$1,450……………..Add’l deduction if over 65 or blind (Single and HH)—$1,150……………..Add’l deduction if over 65 or blind (Single and HH)

Marriage Penalty Reduced (difference in brackets Married v. single) Single brackets are exactly ½ of MFJ Rates New Civil Union Law

—Federal Defense of Marriage Act (only accepts for heterosexuals)

—Same Sex Couples (Can file Joint Illinois but can not file MFJ Federal)

– Illinois - need to attach a facsimile Joint Federal return

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Alternative Minimum Tax (IRS Form 6251) The AMT Exemption amount was raised from

2010 - $47,450/$72,450 (MFJ)and to

2011 - $48,450/$74,450 (MFJ) Calculate Regular Tax then Calculate AMT and pay Higher one AMT Marginal Tax Rates

Dividends and Capital Gains Rate = 15% Rate = 26% if AMT income is under $175,000 Rate = 28% of AMT income is over $175,000

Extended and Enhanced Tax Breaks for 2011

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Individual Tax Relief Extended through 2012

Exemptions and Deductions Personal Exemption Phase-out – OUT Sales Tax Deduction (available if higher than State Income Tax) 3% Limitation of Itemized Deductions (Pease Amendment) – OUT Marriage Relief

—standard deduction is double - single and married filing separate Real Estate Tax Increase in Standard Deduction - gone

—For people who don’t itemize, there is no increase in the 2010 standard deduction for real estate taxes and net disaster losses

Educator Expense Deduction extended —Eligible Educators can deduct up to $250/$500 (MFJ) of any

unreimbursed expenses for books, supplies, equipment, materials used in the classroom

—Eligible educators are K-12 teachers, counselors, principals and aides who work at least 900hrs per school year

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Adoption Credit (fully refundable beginning in 2010)

$13,360 largest refundable tax credit—Any child under age 18—Any disabled person physically or mentally unable to take care of

himself Phase out if MAGI starts at $185,210 gone at $225, 210 Qualified expenses include

—Adoption fees, attorney fees, court costs, travel (including meals) Paper return is required – not allowed to file electronically

—File IRS Form 8839 with Form 1040—Attach Required Documentation

– Adoption Decree from Court or Subsidy Agreement—Refund takes three weeks longer

IRS auditing a high percentage of these returns

Enhanced Credits for 2010 extended through 2012

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FORM 8839 – Qualified Adoption Expenses

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Child Tax Credit Credit for people who have a qualifying child Maximum amount you can claim for credit is $1,000 per child Phase-out begins at $75,000/$110,000 (MFJ) Qualifications for Qualifying Child include:

—Under age 17 at end of tax year— Is your child, stepchild, foster child, sibling, step sibling, or a

descendant of any of them—Lived with you for more than half of tax year—Didn’t provide half of their own support for tax year

Minimum earned income amount used to calculate credit was reduced from $12,550 to $3,000 which will allow more taxpayers to use the credit and increase the amount received.

Enhanced Credits for 2010 extended through 2012

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Residential Energy Property Credit

Extends tax credit for energy efficient improvements to existing homes through 2011

Applies to improvements such as adding insulation, energy efficient exterior windows and energy-efficient furnaces, water heaters, and air conditioning systems

30% of the cost of all qualifying improvements in 2010 (lowers to 10% in 2011).

Maximum credit limit $1,500 for 2010 (lowers to $500 in 2011).

Energy Efficiency and Renewable Energy Incentives

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Earned Income Tax Credit 45% Refundable credit for low to moderate income working

individuals and families with three or more kids Amount of credit increase:

—One Qualifying Child: $3,403—Two Qualifying Children: $5,028—Three Qualifying Children: $5,657—No Qualifying Children: $457

Maximum earned income amounts:—One Qualifying Child: $35,463/$40,463 (MFJ)—Two Qualifying Children: $40,295/$45,295 (MFJ)—Three Qualifying Children: $43,279/$48,279 (MFJ)—No Qualifying Children: $13,440/$18,440 (MFJ)

Enhanced Credits for 2010 extended through 2012

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Going, Going, Gone

First Time Homebuyer Credit (Form 5405) GONE – 2011 Possible Recapture if house sold too soon

Hybrid Auto Credit GONE for card purchased after 2010

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Credits American Opportunity Tax Credit IL Education Expense Credit

Exclusions Educational Assistance Exclusion Nat’l Health Service Corp and Armed Forces Scholarship Exclusion

Deductions Tuition and Fees Deduction Student Loan Interest Deduction Business Deduction for Work-Related Education

Savings Plans 529 Plans – Illinois Bright Start 530 Plans - Coverdell Education Savings Account

Education Benefits

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FBAR – Foreign Bank Account Reporting

IRS Form 1040 Schedule B Questions Signature Authority over a financial account in Foreign country Over $10,000 Required to file Form TD F 90-22.1 with Treasury before June 30th

Distributions from Foreign Trust – File Form 3520 with IRS

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FATCA – Foreign Asset Tax Compliance Act

IRS Form 8938 – NEW with IRS Foreign Financial Assets of more than $50,000

—Bank, securities, partnerships, royalties, [could include real estate].—Broader definition of assets than FBAR

Attach to IRS Form 1040 due April 15th (17th due to Emancipation Day in District of Columbia in 2012)

To avoid duplicated reporting, not required to disclose assets otherwise reported on Forms 5471, 8621, 3520, 8865 or 8891; however required to file and identify the other form .

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FATCA – Foreign Asset Tax Compliance Act

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Questions?

Brian T. Whitlock, CPA, JD, LLMBlackman Kallick, LLP10 S Riverside PlazaChicago, IL 60606Phone (312) 207-1040E-mail: bwhitlock@blackmankallick.com