RECENT TAX DEVELOPMENTS (1st Quarter 2012)
We have summarized some important tax developments that have occurred recently, which may affect you, your family and/or your investments:
Payroll Tax Cut Extended for All of 2012. In February, President Obama signed the “Middle Class Tax Relief and Job Creation Act of 2012.”, which extends the 2% payroll tax cut through the end of 2012 (earlier legislation had extended it for only the first two months of 2012). The 2% payroll tax reduction and the 2% reduction in the Social Security Disability Insurance tax under the Self-Employment Contributions Act for the self-employed applies through December 31, 2012. As a result, for 2012, employees pay only 4.2% Social Security tax on wages up to $110,100 and self-employed individuals pay only 10.4% Social Security self-employment taxes on self-employment income up to $110,100. The maximum savings for 2012 is $2,202 (2% of $110,100) per taxpayer. If both spouses earn at least as much as the wage base, the maximum savings is $4,404.
Some Estates Get More Time to Make Estate Tax Portability Election. The IRS issued guidance giving certain estates of married individuals who died during the first six months of 2011 an extension of the deadline to make the portability election to pass the decedent's unused estate and gift tax exclusion amount to the surviving spouse.
The extension is available to qualifying estates of decedents who are U.S. citizens or residents. A qualifying estate is an estate in which:
- The decedent is survived by a spouse;
- The decedent's date of death is after December 31, 2010, and before July 1, 2011; and
- The fair market value of the decedent's gross estate does not exceed $5,000,000.
The IRS will grant the executor of a qualifying estate a six-month extension until 15 months after the decedent's date of death to make the portability election, which requires timely filing of Forms 706 and 4768.
Retirement Security Initiative. The U.S. Departments of the Treasury and Labor recently announced a sweeping initiative, which is designed to broaden the availability of retirement plan options in order to provide greater certainty in retirement and minimize the risk of retirees outliving or underutilizing their retirement savings. It includes the following:
- Partial Annuity Options. Proposed regulations would change the rules to make it simpler for defined benefit pension plans to offer combinations of lifetime income and a single-sum cash payment. They would allow retirees to receive a steady stream of income for the duration of their lifetimes while keeping a portion of their savings invested in assets with the flexibility to respond to liquidity needs.
- “Longevity” Annuities. Proposed regulations would make it easier for retirees to use a limited portion of their savings to purchase guaranteed income for life starting at an advanced age, such as average life expectancy. These annuities would provide an efficient way for 65 or 70 year olds to address the risk of outliving their assets by purchasing a predictable income stream starting at age 80 or 85.
- Spousal Protection Rules and Deferred Annuities. A new IRS ruling has clarified that employers can offer their employees the option to 401(k) savings to purchase deferred annuities and still satisfy spousal protection rules with minimal administrative burdens.
- Purchase of Defined Benefit Plan Annuities. A new IRS ruling has clarified how the rules apply when employees are given the option to use a single-sum 401(k) payout to obtain a low-cost annuity from their employer's defined benefit pension plan.
- 401(k) Fee Disclosure. Final Labor Department regulations require service providers to furnish information that will enable pension plan fiduciaries to determine both the reasonableness of compensation paid to the service providers and any conflicts of interest that may impact a service provider's performance under a service contract or arrangement.
Relief for Struggling Taxpayers. The IRS made available to certain wage earners and self-employed individuals a six-month grace period on failure-to-pay penalties. Form 1127-A, Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship, had to be completed to seek the relief and had to be postmarked on or before April 17, 2012. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by October 15, 2012. Subject to income and balance due limits, penalty relief is applied for these two categories of taxpayers:
- Wage earners who were unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
- Self-employed individuals who experienced a 25% or greater reduction in business income in 2011 due to the economy.
A taxpayer's income could not exceed $100,000 for single or head of household filers ($200,000 for joint filers). The penalty relief was not available to taxpayers whose calendar year 2011 balance due exceeded $50,000.
In addition, the IRS has raised the threshold for using an installment agreement without having to supply IRS with a financial statement from $25,000 to $50,000.
Residence Interest Limits for Unmarried Co-owners. The Tax Court has held that limitations on deductions for qualified residence interest ($1 million of acquisition indebtedness and $100,000 of home equity indebtedness) are applied on a per-residence basis, and not per-individual basis. Thus, unmarried co-owners were collectively limited to a deduction for interest paid on a maximum of $1.1 million, rather than $2.2 million, of acquisition and home equity indebtedness.
S Corporation Underpaid Employment Taxes. A federal appeals court, affirming a district court, held that an S corporation shareholder-employee's salary was unreasonably low. As a result, it allowed the IRS to reclassify as salary a substantial amount of dividend payments made to the officer during the years at issue. This resulted in the corporation owing employment taxes on the reclassified dividend payments.
FinCEN Gives Taxpayers More Time to E-file FBARs. The Treasury's Financial Crimes Enforcement Network (FinCEN) has announced that electronic filing of Report of Foreign Bank and Foreign Accounts (FBAR) form will not be required until June 30, 2013. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year with the Department of the Treasury on or before June 30, of the succeeding year. The temporary e-filing exemption does not relieve any person of the obligation to file an FBAR and does not affect the required date by which any given FBAR must be received by Treasury.
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