The Middle Class Tax Relief and Job Creation Act of 2012 (the “Act”)
was signed into law on February 22, 2012. The legislation extends, through the
end of 2012, the two percentage point payroll tax cut for employees and self-employed
individuals that had been in place for 2011 and the first two months of 2012

Background

As part of an economic
stimulus law, the Social Security payroll tax for 2011 was reduced by two
percentage points, from 6.2% to 4.2%. A similar reduction was applied to the
self-employment tax for self-employed individuals. At the end of last year, those
payroll and self-employment tax cuts were extended for two months, through
February 2012.

Payroll Tax Cut Extended
Through 2012

For the balance of 2012 only,
employees will continue to pay a 4.2% Social Security

tax rate on wages up to $110,100 (the 2012 Social Security Wage Base).
Similarly, the Act reduces the tax rate for the Social Security portion of self-employment
tax on self-employment net earnings up to $110,100.

Therefore, the maximum savings
for employees and self-employed individuals in 2012 will be $2,202 (i.e., 2% of
$110,100). For spouses who both earn at least as much as the Social Security
Wage Base in 2012, the maximum savings will be $4,404.

Note that employers continue
to pay the full employer portion of Social Security taxes for their
employees.

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We can help you determine how the extension
affects you or your business. Contact us today.

Individual Tax Changes:

Household Employee Withholding – If you withheld income tax from a household employee, you may now report and pay the tax withheld on Form IL-1040. There is a new line for “Household Employment Tax” on 2011 Form IL-1040. Previously a household employer had to file separate employment tax returns if they withheld Illinois tax from a household employee.

IL-1040 Due Date – The due date for filing Illinois individual income tax returns – Form IL-1040, has been extended to April 17, 2012. This is because April 15 is on a weekend and Illinois is following the IRS in observing the Emancipation Day holiday on April 16.

Same-Sex Civil Unions – If you were in a same-sex civil union as of December 31, 2011, you must file your Form IL-1040 using either the “married filing jointly” or “married filing separately” filing status. Such returns must be filed on paper, rather than electronically. Prior to the 2011 tax year, persons in a same-sex civil union filed Illinois tax returns using the “individual” filing status.

Business Tax Changes:

Research and Development Credit – The research and development tax credit which was scheduled to expire on December 31, 2010 has been extended through tax years ending on or before December 31, 2015. If you are a fiscal year filer and did not claim any credit on your return for a tax year ending in 2011, you may amend your return for that tax year to claim the credit, as if the credit never expired.

Suspension of Net Operating Loss Deduction – For tax years ending on or after January 1, 2011 and before December 31, 2012, the use of Illinois net operating loss deductions is suspended. You may continue to earn losses that can be carried and used when the suspension expires. For tax years ending on or after December 31, 2012 and before December 31, 2014, Illinois net operating loss deductions may not exceed $100,000. Previously, no Illinois net operating loss deduction was to be allowed for years ending before December 31, 2014.

New Illinois Tax Appeal Tribunal – The new law provides that Illinois is to create a new, independent tax appeal tribunal to hear appeals of notices of tax liabilities or deficiencies for all taxes administered by the Illinois Department of Revenue. This new tribunal is to be set up by 2013, but details remain to be worked out. Previously, taxpayers had to appeal to a board that was staffed by Illinois Department of Revenue employees. The only way for a taxpayer to obtain an independent review of their appeal was to pay the tax and go to court.

Tax Credits Extended by 5 Years – Any tax credit scheduled to expire in 2011, 2012, and 2013, has been extended by adding 5 years to the expiration date contained in the statute. Previously, several tax credits that did not have an expiration date named in their original statute would automatically expire five years after they were enacted.

Special Sales Factor for Federally Regulated Exchanges – The new law creates an alternative apportionment methodology for “federally regulated exchanges”. This law is widely considered to be a special tax incentive to a large Illinois business that was considering relocating to another state to lower its income tax liability.

Angel Investment Credit – For tax years beginning on or after January 1, 2011, and ending on or before December 31, 2016, an “Angel Investment Credit” may be claimed in an amount equal to 25% of an investment made directly in a qualified new business. The credit is authorized and issued by the Illinois Department of Commerce and Economic Opportunity (“DCEO”) and a certificate from DCEO must be attached to the tax return.

Live Theater Production Tax Credit – For tax years beginning on or after January 1, 2012 (so calendar year 2011 taxpayers cannot take this credit) a new credit is available for costs associated with the production of live theater. This credit is also administered by DCEO and it is capped statewide at $2,000,000 per year.

Small Business Jobs Creation Tax Credit – The Illinois Small Business Jobs Creation Tax Credit is extended through tax years ending prior to January 1, 2016.  The “incentive period” for hiring new employees is extended from June 30, 2011 to June 30, 2016.

Estate Tax Changes:

Illinois Estate tax Exclusion Increased – The Illinois estate tax exclusion is increased to $3,500,000 for persons dying on or after January 1, 2012 and prior to January 1, 2013.  The estate tax exclusion is increased to $4,000,000 for persons dying on or after January 1, 2013.  For persons dying in 2011, the Illinois estate tax exclusion was $2,000,000.  The federal exclusion for persons dying in 2011 and 2012 is $5,000,000.

• Personal exemption — $3,800 per eligible person, up from $3,700.
• Basic standard deduction — $11,900 (married filing jointly), up from $11,600; $8,700 (head of household), up from $8,500; $5,950 (single and married separate), up from $5,800.
• Social Security taxable wage base — $110,100, up from $106,800.
• 401(k), 403(b), and 457 plan elective salary deferrals (annual) — $17,000 (up from $16,500).
• Roth IRA contribution allowability — phaseout range $173,000 to $183,000 of annual adjusted gross income for married couples filing jointly, up from $169,000 to $179,000; $110,000 to $125,000 for single taxpayers and heads of household, up from $107,000 to $122,000.
• Defined contribution retirement plan dollar limit on annual additions — $50,000, up from $49,000.
• Phaseout range for those who make deductible contributions to a

traditional IRA and are covered by a workplace retirement plan:

• Singles and heads of household — $58,000 to $68,000 of modified adjusted income, up from $56,000 to $66,000;
• Married couples filing jointly — in which the spouse who makes the IRA contribution is covered by a workplace retirement plan — is $92,000 to $112,000, up from $90,000 to $110,000.

For IRA contributors who are not covered by a workplace retirement plan but are married to someone who is covered, the phaseout range is $173,000 to $183,000, up from $169,000 to $179,000.

• Defined benefit plan limit on annual benefits — $200,000, up from $195,000.
• Maximum annual compensation used to determine benefits or contributions — $250,000, up from $245,000.
• Dollar limit used to define highly compensated employee – $115,000, up from $110,000.
• Compensation limitation defining key employee/officer to “top heavy” plan purposes – $165,000, up from $160,000.
• “Nanny” tax threshold — annual payment of $1,800, up from $1,700.
• The gift-tax, generation-skipping-transfer (GST) tax, and estate-tax exemption amount — $5,120,000, up from $5,000,000.
• Dollar limitation on property eligible for Section 179 expensing election used in a trade or business — $139,000, up from a previously scheduled $125,000. Limit is reduced dollar for dollar as the cost of eligible property placed in service exceeds $560,000, up from $500,000.

Also, tax bracket thresholds increase for each income-tax filing status and rate. For example, for a married couple filing a joint return, the taxable income threshold separating the 15% bracket from the 25% bracket is $70,700 in 2012, up from $69,000 in 2011.

We Can Help

Please contact us if you have any questions regarding these, or any other, tax law limits for 2012. We can also assist with all of your 2011 tax return preparation needs.

There’s still time to take steps that will reduce your business’ 2011 federal tax bill.  Soon-to-be-expiring tax breaks present attractive tax-planning opportunities, assuming your business has the requisite resources to make the investment.

Heavy-SUV Tax Breaks

If a business has a need for a large sport utility vehicle (SUV), potentially large tax breaks are scheduled to expire at year end. The 100% first-year bonus depreciation deduction, as well as the tax code Section 179 expensing provisions, present attractive opportunities to purchase a heavy SUV in 2011. To qualify for the maximum available tax break, the vehicle generally must have a manufacturer’s gross vehicle weight rating of more than 6,000 pounds.

100% First-year Bonus Depreciation

A business may qualify for a 100% first-year depreciation deduction for a qualifying vehicle. To take advantage of this tax break, a business must place a new (used vehicles do not qualify) heavy SUV in service by December 31, 2011, and use it more than 50% for business purposes (the 100% deduction is limited to the business-use portion).

A business may also claim a 100% bonus depreciation deduction for qualifying new equipment and software that are placed in service by December 31, 2011. Generally, this tax break includes phones, computers, office furniture, machinery, and software — far-reaching enough that it applies to most business assets acquired before year end. Certain real estate improvements, such as those relating to sidewalks and drainage systems, qualify, too.

Section 179 Expensing

Under tax code Section 179, a business may deduct up to $25,000 of the cost of a used heavy SUV. The vehicle must be placed in service prior to the end of the business’ tax year and used over 50% for business purposes. The balance of the business portion of the used SUV’s cost may be depreciated under normal depreciation (MACRS) rules.

A $500,000 first year Section 179 expensing limit otherwise applies to most business asset purchases for 2011. Generally, most business equipment and software qualify under this provision.

Be careful, though, if your business is expected to have a tax loss for the year. You cannot claim a Section 179 expensing deduction that creates or increases a business’ tax loss.

We Can Help

Please contact us if you have any questions relating to these or any other tax breaks that may be advantageous to your business.

Eligible Rollover Distributions

An “eligible rollover distribution” is generally a distribution from an eligible retirement plan other than: periodic distributions, so-called “minimum required distributions” (generally, required after age 70½), or hardship distributions.

Generally, an amount equal to 20% of an eligible rollover distribution must be withheld by the payor to the extent the distribution consists of previously untaxed amounts.

Example: Lois, a 401(k) plan participant, contributed $40,000 over the years to the plan on a tax-deferred basis. During that time, the contributions earned $20,000 of tax-deferred income. When Lois retired and
withdrew from the plan the $60,000 balance of untaxed contributions and earnings, the withdrawal was subject to 20% withholding.

Eligible rollover distributions are not subject to mandatory withholding for expected annual distributions of $200 or less. 

Trustee-to-trustee Transfers

A major exception to the mandatory 20% withholding requirement applies if the plan directly “rolls over” (via a trustee-to-trustee transfer) an eligible rollover distribution to another employer’s qualified plan or to an IRA.

Example: Rather than take her distribution in cash, Lois directed the plan trustee to transfer her $60,000 balance to a rollover IRA. In this case, no federal tax withholding is required.

Periodic Payments

Periodic payments are generally considered those made at regular intervals and that endure for more than one year, such as an annuity. Then, the payor must withhold from the payment as if it were a wage payment. Plan participants can inform the plan administrator through IRS Form W-4P, Withholding Certificate for Pension or
Annuity Payments, of the federal income tax amount to be withheld from the periodic payment (or that no tax should be withheld). Such an election may be revoked by the participant at any time. Absent such an election, the employer must withhold for periodic payments at a rate based on a married individual with three withholding exemptions.

Nonperiodic Payments

As the name suggests, nonperiodic payments are distributions that are not usually made at set intervals and are not eligible rollover distributions. Examples include:

• Excess contributions and excess aggregate contributions repaid from a plan if made within 2½ months after the end of the plan year;
• Hardship withdrawals; and
• Loans deemed to be distributions (on failure to repay, for example)

Unlike other distributions, nonperiodic payments are generally subject to 10% tax withholding. The recipient may elect no withholding or a different amount by filing Form 4-WP with the plan administrator.

We Can Help

Please contact us if you have any questions relating to the federal income tax withholding rules for distributions from an employer-sponsored retirement plan — and the planning options available regarding distributions.