Helpful Tips
Estimated Tax Payments
Use Tax
Unclaimed Property
A Little Short on April 15th?
Charitable Contribution - Deductible or Not?
Vehicle Donation Rules
Kiddie Tax Alert!
New for 2011
Continuing for 2011
Estimated Tax Payments
No penalty for failure to pay estimated tax will apply to an individual whose tax due is less than $1,000 for the year. Also, a U.S. citizen or resident need not pay estimated tax if he or she had no tax liability for the preceding 12-month tax year. Individuals who do not qualify for these two exceptions may generally avoid the penalty for failure to pay estimated tax by paying at least 90% of the current year's tax liability or paying 100% of the prior year's tax liability. A special rule applies to individuals with adjusted gross income for the previous tax year in excess of $150,000 ($75,000 for married individuals filing separately). For these individuals the prior year safe harbor percentage is 110% of the prior year's tax liability for both the Internal Revenue Service and State of Michigan. The required payments may be made either through withholding or generally payment of equal quarterly installments. In the event that your income has increased from the prior year, it is generally best to use the prior year safe harbor rule to keep you "safe" from penalty. You may have a balance due with your income tax return, but you have kept your money working for you rather than the IRS.
Use Tax
Every state with a sales tax has a companion tax for purchases outside the state. In Michigan, that tax is called the "use tax". While many Michigan residents are not aware of the use tax, it has been on the books since the 1930's. The law says that you owe tax on purchases from companies that do not collect Michigan sales or use tax. This includes mail order and Internet purchases as well as purchases while traveling in foreign countries and other states. You do not have to pay Michigan use tax if (1) Michigan sales or use tax was paid to the seller, (2) The seller charged another state's sales tax of at least 6% on purchases made while traveling in that state, or (3) Purchases made outside Michigan in a calendar month did not exceed $10. Examples of purchases subject to use tax include (1) Out-of-state catalog, Internet or mail order purchases ( L.L. Bean, Amazon.com), and (2) Purchases made outside of Michigan (furniture, computers, appliances). An out-of-state business that does not have a store, warehouse, or employees in Michigan does not have to register and collect Michigan use tax. However, many may voluntarily collect use tax for their customers.
Beginning with tax year 1999, the use tax could be paid on MI-1040 Michigan Income Tax Return. The use tax due can be calculated by multiplying purchases under $1,000, if you know the actual amount, by 6% (.06) or for purchases under $1,000, if you have incomplete or inaccurate receipts, you may use the Use Tax Table that is provided in the Michigan Tax Instruction Booklet. In all cases, if a single purchase exceeds $1,000, you must pay 6% on those purchases. Maintaining these records throughout the year will make this calculation easier.
Unclaimed Property
The Michigan Department of Treasury is holding millions of dollars in abandoned and unclaimed property belonging to Michigan residents. To check if the Treasury Department is holding funds for you or your family, visit their web site by clicking Here.
Michigan businesses should be aware that they are required to remit the unclaimed property to the Michigan Department of Treasury. Some of the more common unclaimed properties that businesses may encounter are money, checks, deposits, customer overpayments, uncashed checks, gift certificates, security deposits, and unpaid wages. Early in 2011, the Treasury Department mailed a Notice Regarding Your Obligation to Report Unclaimed Property to all Michigan businesses, stating that every business must file a report for unclaimed property or attest that they have none by July 1st of each year. The forms are available on the State of Michigan website at michigan.gov/unclaimedproperty.
A Little Short on April 15th?
For those taxpayers who find themselves short of funds to pay that tax bill on April 15th here are some options that may help you
Take out a loan. At first this may not sound like an appealing option but consider this: The IRS late-filing penalty is 5% per month on the tax you owe in addition to the late-payment penalty of ½ % per month. That's 5 ½ % per month up to a maximum of 5 months. After that, the late-payment penalty continues on your outstanding balance. In addition, interest is charged on the outstanding balance at the federal short-term rate plus 3%. Depending on your circumstances, you can see how a loan might not be such a bad idea.
Of course, the best loan is an interest-free or low-interest loan from family or friends. Just keep in mind that if the loan is over $10,000 there are imputed interest issues to consider.
A personal loan from a financial institution might be another option for you, although the interest is considered personal and therefore not deductible.
Perhaps the best option for homeowners is to take out a home equity loan or a draw from a home equity line of credit. Unlike the other two choices, the interest paid on this loan would be deductible on your individual tax return.
Use your credit card. You could also charge your tax liability for a non-deductible fee of 2 ½ % to 4%. This fee combined with your credit card interest rate is an expensive choice unless you pay your balance within a month.
If none of these options suit you, the important thing to remember is that if you are able to file your return on April 15th do so. If not, file an extension and avoid the 5% late-filing penalty and work out an installment agreement with Uncle Sam.
Charitable Contribution - Deductible or Not?
The IRS has introduced new documentation requirements that affect the deductibility of charitable contributions. The following is not a complete list, but are the ones that will affect most taxpayers who take charitable contribution deductions.
Cash contributions of Less than $250 in Single Donation. It's no longer sufficient to simply keep good records of these donations. Instead, cash contributions of less than $250 given in a single contribution are only deductible if you keep a bank record (most likely a cancelled check, wire transfer acknowledgement, or credit card record) or written acknowledgement from the charity. It is advisable to make contributions by check rather than cash to ensure their deductibility.
Cash and Property Contributions of More than $250 in Single Donation. Rules for substantiation of larger contributions of cash or other property (those that are more than $250) have not changed. A written acknowledgement must be obtained, showing the description of the property or amount of cash donated and a statement as to whether the donor received any goods or services for the property donated. A cancelled check or other reliable records are not sufficient proof.
Contributions of Used Clothing and Household Items. Donated clothing and household items must be in "good condition or better" to claim a deduction. If the item is valued at more than $500, an appraisal must be obtained and attached to the tax return.
Contributions Via Payroll Deductions. For any amount of contributions made by payroll withholding, you are now required to keep an official pledge card from the charity and documents from your employer (ex: pay stub, W-2) showing the amount donated.
Vehicle Donation Rules
Taxpayers are no longer able to use their discretion to determine the charitable deduction for a donated vehicle. Lawmakers have long believed that taxpayers have been claiming inflated deductions for their donated vehicles and Congress has recently cracked down on this abuse in the 2004 Jobs Act. Under the new tax law, the deduction will be limited to the actual sales price of the vehicle when sold by the charity, with some exceptions.
- Example: Ann decides to donate her old car to a local charitable organization. Based on the condition of the vehicle, she looks up the vehicle's "Blue Book" value and determines that the car is worth $1,500. On August 1, 2010, she donates the car. On September 30, 2010, the charity sells the vehicle for $800. Under the old rules, Ann would have claimed a $1,500 deduction. Under the current rules, the deduction will be limited to $800, the gross proceeds received by the charitable organization from the sale of Ann's vehicle.
An important exception to this rule exists if the charitable organization intends to "significantly" use the vehicle in its charitable activities or make "major" improvements before selling it. In either of these cases, the taxpayer's donation is the vehicle's FMV before any improvements.
The charitable organization must provide a written acknowledgement to the donor on a timely basis. The acknowledgement must include the following:
- Donor's name and TIN;
- Vehicle identification number; and
- Date of contribution.
If the vehicle is sold, the acknowledgement must include the date of the sale and the gross proceeds from the sale. Similarly, the organization must identify if it intends to use or improve the vehicle. The charitable organization must also report the donation to the IRS on Form 1098-C. The taxpayer must include a copy of the acknowledgement with their tax return or the deduction will be disallowed.
Kiddie Tax Alert!
There were significant changes to the "Kiddie Tax" in 2008 and it is still in effect in 2011. Your dependent child age 18 or under or under 24 if the child is a full time student at year-end, who has unearned income (typically from investments) over $1,900 may be taxed at the parent's higher tax rate.
If the following four requirements are met, the excess unearned income (over $1,900) will be taxed at the parent's higher tax rate.
- One or both of the child's parents are alive at the year-end and are in a higher income tax bracket.
- The child doesn't file a joint income tax return.
- The child's unearned income exceeds $1,900 for 2011.
- Your child is-
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- Age 18 or under at the end of the year and doesn't have earned income that exceeds 50% of his or her support.
- Age 19-23 at the end of the year, is a full time student and doesn't have earned income that exceeds 50% of his or her support.
Tax Planning Advice
There are ways to plan ahead that may reduce this "Kiddie Tax". Invest in a 529 College Savings Plan. This investment income is not subject to the additional tax; however, these funds must be used for higher education to receive the desirable tax free status. Another option for investing for your child is to invest in tax-exempt municipal bonds or growth oriented stocks.
New for 2011
Individuals
Payroll tax holiday. Employees will pay only 4.2% (instead of the usual 6.2%) OASDI (Social Security) tax on compensation received during 2011 up to $106,800 (the wage base for 2011). Similarly, self-employed persons will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800. In either case, the maximum savings for 2011 will be $2,136 (2% of $106,800) per taxpayer. If both spouses earn at least as much as the wage base, the maximum savings will be $4,272.
Stricter rules apply to energy saving home improvements. You can claim a tax credit for energy saving home improvements you make this year, but stricter rules apply for 2011 than for 2010. You can only claim a 10% credit for qualified energy property placed in service in 2011 up to a $500 lifetime limit (with no more than $200 from windows and skylights). What's more, the credit you claim for any year can't exceed $500 less the total of the credits you claimed for all earlier tax years ending after Dec. 31, 2005. The amount you claim for windows and skylights in a year can't exceed $200 less the total of the credits you claimed for these items in all earlier tax years ending after Dec. 31, 2005. The credit is equal to the sum of: (1) 10% of the amount you pay or incur for qualified energy efficient improvements (such as insulation, exterior windows or doors that meet certain energy efficient standards) installed during the year; and (2) the amount of the residential energy property expenses you paid or incurred during the year. The credit for residential energy property expenses can't exceed: (A) $50 for an advanced main circulating fan; (B) $150 for any qualified natural gas, propane, or hot water boiler; and (C) $300 for any item of energy efficient property (advanced types of energy saving equipment, such as electric heat pumps, meeting specific energy efficient standards).
Restricted definition of medicine for health plan reimbursements. Beginning this year, the cost of over-the-counter medicines can't be reimbursed with excludible income through a health flexible spending arrangement (FSA), health reimbursement account (HRA), health savings account (HSA), or Archer MSA (medical savings account), unless the medicine is prescribed by a doctor or is insulin. This new rule applies to amounts paid after 2010. However, it does not apply to amounts paid in 2011 for medicines or drugs bought before Jan. 1, 2011. Also, for distributions after 2010, the additional tax on distributions from an HSA that are not used for qualified medical expenses increases from 10% to 20%.
Roth IRA income limit. You may be able to make a Roth IRA contribution if your modified AGI is less than $122,000 ($179,000 if you are married filing jointly).
Businesses
Section 179 expensing. Section 179 rules for 2011 remain at the same generous amounts as 2010 (see Continuing for 2011 below). But for 2012, the maximum expensing amount under Section 179 will drop from $500,000 to $125,000, and the phaseout amount will drop from $2,000,000 to $500,000. After 2012, the maximum expensing amount drops to $25,000 and the phaseout amount drops to $200,000.
Continuing for 2011
Individuals
The Tax Relief Act of 2010. The Tax Relief Act of 2010 included an extension of the Bush-era tax cuts through 2012, estate tax relief, a two-year patch of the alternative minimum tax (AMT), and a host of extended tax breaks for individuals and businesses. Here's a look at the key elements of the package:
- The current income tax rates were retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
- A two-year AMT patch for 2010 and 2011 provides a modest increase in AMT exemption amounts and allows personal nonrefundable credits to offset AMT as well as regular tax.
- The $1,000 child tax credit was retained through 2012.
- The American Opportunity (higher education) tax credit was extended through 2012. (The Lifetime Learning credit is also still in place.)
- Other extended provisions included the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; the above-the-line deduction for qualified higher education expenses; and the provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year.
- After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010's or 2011's rules.
Conversions to Roth IRAs. The modified AGI and filing status requirements for conversions to Roth IRAs were eliminated for tax years following 2009.
Personal exemption and itemized deduction phase-outs end. For 2010 through 2012, taxpayers with AGI above a certain amount no longer lose part of their deduction for personal exemptions and itemized deductions.
Health Care coverage for adult children to age 26. Employers that offer dependent care coverage are required to offer coverage to enrollee's children until age 26, even if they are no longer a student or dependent. This is effective for plan years that begin on or after September 23, 2010.
Recapture of first-time homebuyer credit. If you claimed the first-time homebuyer credit for a home you bought in 2008, you must start repaying the credit in 2010 and continue the repayment over a 15-year period.
Businesses
Small Employer Health Insurance Tax Credit. Effective as of 2010 and going through 2013, the Health Reform legislation provides a new tax credit for small employers that employ no more than 25 full time equivalent (FTE) employees, pay annual FTE wages that average no more than $50,000 for the year and have a qualified health insurance plan under which they pay at least 50% of the premiums for employees who are in the plan.
Expansion and extension of additional first-year depreciation. The maximum Section 179 expensing amount of $500,000, with and a phaseout level of $2,000,000 is still in place for 2011. For bonus depreciation, the provision for 50% additional first-year depreciation was retained though 2012, and the provision for the election of 100% bonus depreciation was extended through December 31, 2011.
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