We wanted to take this time to remind you that if you are required to pay personal estimated tax payments, the deadline is approaching and payments should be made by September 15, 2011. The required annual payment for most individuals is the lower of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. Certain high-income individuals must meet a more rigorous requirement. If the adjusted gross income on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return on 110% of the tax shown on the return for the previous year. If you fail to make the required payments, you may be subject to an underpayment penalty. The penalty equals the product of the interest rate charged by IRS on deficiencies, times the amount of the underpayment for the period of the underpayment.
As we approach the 4th Quarter, this is typically the best time to consider year-end tax planning strategies. Some considerations may involve planning around the timing of income and deductions or consideration of 2011 gifting opportunities for estate tax purposes.
It is important to remember the following points when evaluating tax planning ideas:
- The objective should be to achieve your personal financial and business goals in the most “tax efficient” manner possible. Minimizing taxes enhances overall investment and business returns. Depending on your anticipated income for the current and subsequent years, it may also be advantageous to defer or accelerate the recognition of income.
- Although tax planning is most effective when done throughout the year, many tax savings, deferral or acceleration strategies can be identified and implemented as year-end approaches.
- Effective tax planning requires accurate estimates of taxable income for 2011 and 2012. Developing good estimates is critical to making planned tax savings become a reality.
- Not every tax planning opportunity is appropriate for every person. However, identifying specific planning ideas that work for you can reduce your taxes or take advantage of utilizing the best tax brackets for current and subsequent years.
We would be happy to schedule a time to further review your tax and financial planning situation. Please do not hesitate to contact us should you have any questions.
Each year, the IRS and state agencies send out millions of notices to taxpayers for various reasons. Over the last year, there has been a significant increase in the volume of these notices due to the enhanced matching program between the federal government and the state agencies.
If you receive a notice, here are some steps you should take:
- Don’t panic. Many of these letters can be dealt with simply and painlessly. There are a number of reasons why you might receive a notice. Notices may request payment of taxes, notify you of changes to your account, or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
- If you would like Newburg to assist and respond to the notice, please fax the entire notice to 781- 884-4100 or email to email@example.com. You can also mail the notice to our offices at 890 Winter Street, Suite 208, Waltham, MA 02451. We will review the correspondence and go over with you the best course of action. We will contact you upon notice receipt. Newburg does charge for this service, similar to all professional services at our normal hourly rate.
- If you would like to handle the notice yourself, each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Having a copy of your tax return and the correspondence available when you call will help in your inquiry. It’s important that you keep copies of any correspondence with your records.
Frequently asked questions
What if I require additional time to handle the correspondence?
We can assist in placing a hold on your account to grant you additional time.
I received a notice assessing additional tax for not reporting proceeds from the sale of stocks/mutual funds. The IRS has assessed significant additional tax as a result. Is this correct?
If you forget to report the sale of stocks or mutual funds on your tax return, the IRS will assess a tax based on you having zero tax basis (or cost). To resolve the situation a letter or in all likelihood an amended tax return may be necessary to report your correct tax basis and remove or adjust the tax assessed.
Is it uncommon that the IRS or state agency will incorrectly post a payment or not capture the correct withholdings?
No, quite often the IRS or state agency will make posting errors that require back-up of the specific check or documents which can be faxed/emailed/mailed, along with a cover letter.
Our notice response went out timely, but I just received an additional notice in the mail demanding the same information/payment. What should I do?
Please forward the notice to us to assess. Sometimes notice responses and letters cross in the mail and in that case, we would need to wait for the IRS or State agency to process the response sent. This generally takes approximately 6 to 8 weeks.
Also, we would like to make you aware of a new email scam targeting taxpayers. An email claiming to be from the IRS or the Federal Reserve tells the taxpayer that a return or payment cannot be processed until the taxpayer provides additional personal information. However, the IRS and Federal Reserve never send these emails. If you receive this email, please delete it. If you are unsure about the validity, please feel free to forward the email to firstname.lastname@example.org and a member of the Newburg team will let you know if the email is legitimate.
Each U.S. person who has a financial interest in or signature or other authority over foreign bank accounts, securities accounts or other financial accounts must file a Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts or FBAR) for each calendar year during any part of which the aggregate value of the accounts exceeds $10,000. This is true even if the account has not earned any income during the year. For this purpose, a debit card account is a financial account, and a credit card account may be treated as a financial account under certain circumstances. The FBAR is due by June 30 following the year for which it applies. Please note the FBAR is not filed with the filer’s federal income tax return. The granting, by the IRS, of an extension to file federal income tax returns does not extend the due date for filing an FBAR.
The penalties for failure to file a FBAR are onerous. The civil penalties for a non-willful violation may not exceed $10,000 per violation. Civil penalties for a willful violation may not exceed the greater of $100,000 or 50% of the amount in the account at the time of the violation. The criminal penalty for willful violations is a fine of not more than $250,000, or imprisonment for not more than five years, or both.
Under a temporary relief provision, taxpayers who failed to file a prior year FBAR report on an account for which they had no tax liability can cure the FBAR delinquency without being subject to civil or criminal penalties. The IRS is offering people with undisclosed income from offshore accounts an opportunity to participate in a new, voluntary disclosure initiative in order to get current on their tax returns. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) will be available only through Aug. 31, 2011. This is accomplished by the taxpayer filing a delinquent FBAR report with an explanatory statement by August 31, 2011. This temporary relief provision benefits: (1) taxpayers who have signature authority over a foreign account but no beneficial interest in that account, (2) taxpayers who reported all income from the foreign account to IRS, but failed to file a FBAR, or (3) taxpayers who had a non-income producing foreign financial account. However, FBARS for 2010 are due on June 30, 2011 and must be filed by that date.
If you want to file, or are uncertain whether you are required to file, a FBAR for a particular foreign account for the current year or for a past year, please do not hesitate to call us to discuss your situation and the best way to proceed.
The IRS assesses penalties for underpayment of income tax. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
What are the requirements to avoid penalties? The required annual payment for most individuals is the LOWER of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. Certain high-income individuals must meet a more rigorous requirement. If the adjusted gross income on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.
Can you provide some examples? For example, if your total tax paid on the 2010 tax return was $10,000 and you are anticipating significantly higher income for 2011, the IRS is content as long as you pay in $10,000 via withholding or through even quarterly payments. The balance due on the 2011 tax return will need to be paid with the 2011 filing by April 15, 2012.
Should your income decrease significantly in the subsequent year, you would default to the 90% of tax shown on the current year return. By way of example, if you paid in $100,000 in tax for 2010, and you expect your income tax to be 50% less than it was in 2009, you would need to pay in 90% of $50,000 or $45,000 to avoid penalty. In this situation, we often recommend considering a tax projection to make sure you are adequately paid in.
What if I change from a salaried employee to self-employed? This will require that you switch to quarterly estimate tax payments and adhere to the 90% current year tax or 100% of prior year tax rule as stated above.
What if I am a salaried employee and my withholdings are not adequate? You would be subject to penalties if you do not update your W-4 kept on file by your employer. We recommend that you review and update your W-4 form. The W-4 form provides you the option to claim an additional set withholding amount over and above what they are taking. It is not uncommon to be filing Married 0 exemptions and still be short on your required payments due to other income circumstances, lack of deductions, etc. Your other alternative would be to pay in the difference via quarterly estimated tax payments.
What if your self-employment income is not steady throughout the year? Most individuals make estimated tax payments in four installments. In other words, we determine the required annual payment, then divide that number by four and make four equal payments by the due dates. But you may be able to make smaller payments under the annualized income method. This method is useful to people whose income flow is not uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business that you operate in a resort area during June, July, and Aug., no estimated payment is required before Sept. 15. You may alsowant to use the annualized income method if a significant portion of your income comes from capital gains on the sale of securities which you sell at various times during the year.
Are there circumstances where the underpayment penalties do not apply? The underpayment penalty doesn’t apply to you:
- if the total tax shown on your return is less than $1,000 after subtracting withholding tax paid;
- if you were a U.S. citizen or resident for the entire preceding year, that year was 12 months, and you had no tax liability for that year;
- if you are a farmer or fisherman and pay your entire estimated tax by Jan. 15 of the following year, or pay your entire estimated tax by Mar. 1 of the following year and also file your tax return by that date; or
- for the fourth (Jan. 15) installment, if you aren’t a farmer or fisherman, file your return by Jan. 31 of the following year, and pay your tax in full.
Will an extension buy me some time to pay my taxes? No. An extension of time to file a tax return is NOT an extension of time to pay the tax due under the return. You must pay in 90% of the anticipated tax come extension time to avoid penalties.
How are the penalties and interest calculated? The addition to tax is one-half of 1% of the tax not paid, for each month (or part of the month) it remains unpaid, up to a maximum of 25%. The penalty increases to 1% per month beginning with either the 10th day after notice of levy is given or the day on which notice and demand is made. Interest on underpayments of tax is imposed at the federal short-term rate plus three percentage points. These rates are adjusted quarterly.
In addition, IRS may waive the penalty if the failure was due to casualty, disaster, or other unusual circumstances and it would be inequitable or against good conscience to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.
If you have any other specific questions about how the estimated tax and underpayment penalty rules apply to you, please do not hesitate to contact us.
For eligible individuals, HSAs offer a tax-favorable way to set aside funds (or have their employer do so) to meet future medical needs. Here are the key tax-related elements:
- Contributions you make to an HSA are deductible, with limits,
- Contributions your employer makes aren’t taxed to you,
- Earnings on the funds within the HSA are not taxed, and
- Distributions from the HSA to cover qualified medical expenses are not taxed.
Who is eligible? To be eligible for an HSA, you must be covered by a “high deductible health plan”. You must also not be covered by a plan which (1) is not a high deductible health plan, and (2) provides coverage for any benefit covered by your high deductible plan. (It’s okay, however, to be covered by a high deductible plan along with separate coverage, through insurance or otherwise, for accidents, disability, or dental, vision, or long-term care.)
Deduction limits. You can deduct contributions to an HSA for the year up to the total of your monthly limitations for the months you were eligible. For 2010, the monthly limitation on deductible contributions for a person with self-only coverage is 1/12 of $3,050. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $6,150. Thus, deductible contributions are not limited by the amount of the annual deductible under the high deductible health plan.
OTC and distribution rules. As of 2011, this new health reform law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a Health Reimbursement Account (HRA) or health Flexible Savings Account (FSAs) and from being reimbursed on a tax-free basis through a Health Savings Account (HSA) or Archer Medical Savings Accounts (MSA). Distributions from a HSA or an Archer MSA that are not used for qualified medical expenses are subject to a 10% tax and the new legislation increases this to 20%.
Additionally, allowable contributions to health FSAs will be capped at $2,500 per year, effective for tax years beginning after December 31, 2012. The dollar amount will be indexed for inflation after 2013. If you would like more information regarding the changes to HSAs and FSAs please contact Newburg & Company LLP.