October Extension Due Date Rapidly Approaching

Article Highlights

• October 15 is the extended due date for filing 2012 federal individual tax returns. 

Late-filing penalty for individual federal returns is 5% of the tax due for each month, or part of a month, for which a return is not filed, up to a maximum of 25% of the tax due. A separate penalty applies for filing a state return late.

If you could not complete your 2012 tax return by the normal April filing due date, and are now on extension, that extension expires on October 15, 2013, and there are no additional extensions. Failure to file before the extension period runs out can subject you to late-filing penalties.

There are no additional extensions, so if you still do not or will not have all of the information needed to complete your return by the extended due date, please call the office so that we can explore your options for meeting your October 15 filing deadline.

If you are waiting for a K-1 from a partnership, S-corporation, or fiduciary return, the extended deadline for those returns was September 16. So, if you have not received that information yet, you should probably make inquiries. 

Late-filed individual federal returns are subject to a penalty of 5% of the tax due for each month, or part of a month, for which a return is not filed, up to a maximum of 25% of the tax due. If you are required to file a state return, and do not do so, the state will also charge a late-file penalty.

If our office is waiting for some missing information to complete your return, we will need that information at least a week before the October 15 due date. Please call our office immediately if you anticipate complications related to providing the needed information, so that a course of action may be determined for avoiding the potential penalties.

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October 2013 Due Dates

October 2013 Individual Due Dates

October 10 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during September, you are required to report them to your employer on IRS Form 4070 no later than October 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

October 15 - Individuals

If you have an automatic 6-month extension to file your income tax return for 2012, file Form 1040, 1040A, or 1040EZ and pay any tax, interest, and penalties due.

October 15 -  SEP IRA & Keogh Contributions

Last day to contribute to SEP or Keogh retirement plan for calendar year 2012 if tax return is on extension through October 15.

October 2013 Business Due Dates

October 15 -  Electing Large Partnerships

File a 2012 calendar year return (Form 1065-B). This due date applies only if you were given an additional 6-month extension. March 15 was the due date for furnishing Schedules K-1 or substitute Schedule K-1 to the partners.

October 15 - Social Security, Medicare and withheld income tax

If the monthly deposit rule applies, deposit the tax for payments in September.

October 15 - Nonpayroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in September.

October 31 - Social Security, Medicare and Withheld Income Tax

File Form 941 for the third quarter of 2013. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until November 12 to file the return.

October 31 - Certain Small Employers

Deposit any undeposited tax if your tax liability is $2,500 or more for 2013 but less than $2,500 for the third quarter.

October 31 - Federal Unemployment Tax

 Deposit the tax owed through September if more than $500.

If you need assistance or have any questions about these due dates please call our office.

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Don’t Overlook the Credit for Small Employer Health Insurance Premiums

The tax law provides a credit for small business employers in 2010, 2011, 2012, and 2013 that pay the health insurance premiums for their low- to moderate-income workers.  This refundable credit can be as much as 35% of the insurance premiums paid by the employer. 

To qualify for the credit, the employer can’t have more than 25 full-time equivalent employees, and the average wage of the employees cannot exceed $50,000 for the year.  The 25 full-time equivalent employee limit is computed by taking into account both full-time and part-time employees for the year using a formula.

To see if your firm may qualify for the credit, complete the two worksheets below¾the results at lines 6 and 9 will tell you if your firm is under the maximum full-time equivalent employee and average wage limitations.  

Determine the Number of Full-Time Equivalent Employees:
1. Enter the number of employees who worked 2,080 hours or more during the year
2. Multiply line 1 by 2,080
3. Enter the total hours worked by all employees who worked less than 2,080 hours during the year
4. Enter the total of lines 2 and 3
5. Divide the result on line 4 by 2,080
6. Number of full-time equivalent employees (round line 5 down to the next    whole number, unless the number is less than one, in which case enter 1.
If line 6 is greater than 25, stop¾your firm does not qualify for this credit.
Determine the Average Annual Wage:
7. Enter the total of all wages paid to employees during the tax year
8. Divide line 7 by the number of full-time equivalent employees (line 6)
9. Average annual wage (round amount from line 8 down to the next whole $1,000)

If the amount on line 9 is $50,000 or less, you may qualify for the credit.  Besides meeting the limits of lines 6 and 9, to qualify for the credit an employer has to contribute at least 50% of the premiums for the employees’ health insurance coverage on a uniform basis. However, for tax years beginning in 2010 only, an employer can meet this requirement even if it pays differing percentages of different employees’ premiums as long as all employer payments are at least 50% of each employee’s premium based on single (employee-only) coverage.

The amount of the credit gradually phases out if the number of full-time equivalent employees exceeds ten or if the average annual wage of the employees exceeds $25,000. Under the phase-out, the full amount of the credit is available only to an employer with ten or fewer full-time equivalent employees and whose employees have average annual wages of less than $25,000.

Please give our office a call if you have questions related to this credit or determining whether your firm can benefit from claiming the credit. 

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Preparing for the New Surtax

As part of the Affordable Care Act (the new health care legislation), a new tax kicks in this year. The official name of this tax is the Unearned Income Medicare Contribution Tax, and even though the name implies it is a contribution, don’t get the idea that it is voluntary or that you can deduct it as a charitable contribution. It is actually a surtax levied on the net investment income of taxpayers in the higher income brackets. And although it is perceived as an additional tax on higher-income taxpayers, it can affect even those who normally don’t have higher income if they have a large income from the sale of real estate, stocks, or other investments.

The surtax is 3.8% on whichever is less: your net investment income or the excess of your modified adjusted gross income (MAGI) over a threshold based on your filing status. Net investment income is your investment income reduced by investment expenses; MAGI is your regular AGI increased by income excluded for working out of the country.

The filing status threshold amounts are:   

• $250,000 for married taxpayers filing jointly and surviving spouses.
• $125,000 for married taxpayers filing separately.
• $200,000 for single and head-of-household filers.

Example: A single taxpayer has net investment income of $100,000 and MAGI of $220,000. The taxpayer would pay a Medicare contribution tax only on the $20,000 amount by which his MAGI exceeds his threshold amount of $200,000, because that is less than his net investment income of $100,000. Thus, the taxpayer’s Medicare contribution tax would be $760 ($20,000 × 3.8%).

Investment income includes: 

• Interest, dividends, annuities (but not distributions from IRAs or qualified retirement plans), and royalties,
• Rents (other than derived from a trade or business), 
• Capital gains (other than derived from a trade or business),
• Home-sale gain in excess of the allowable home-gain exclusion,
• A child’s investment income in excess of the excludable threshold if, when eligible, the parent elects to include the child’s investment income on the parent’s return, 
• Trade or business income that is a passive activity with respect to the taxpayer, and
• Trade or business income with respect to trading financial instruments or commodities.

Planning Note: For surtax purposes, gross income doesn’t include interest on tax-exempt bonds. Thus, one can avoid or reduce the net investment income surtax by investing in tax-exempt bonds.  

Investment expenses include:

• Investment interest expense, 
• Investment advisory and brokerage fees,
• Expenses related to rental and royalty income, and
• State and local income taxes properly allocable to items included in Net Investment Income.

Do you think you will never get hit with this tax because your income is way under the threshold amounts? Don’t be so sure. When you sell your home, the gain is a capital gain, and to the extent that the gain is not excludable using the home-gain exclusion, it will add to your income and possibly push you above the taxation thresholds. And, since capital gains are investment income, you might be in for a surprise. The same holds true for gains from selling stock, a second home, or a rental. So when planning to sell a capital asset, be sure to consider the impact of this new surtax.

The surtax also applies to the undistributed net investment income of trusts and estates, and there are special rules applying to the sale of partnership and Sub-S Corporation interests.

Example: A taxpayer has owned a residential rental property for a number of years, planning to use the rental’s increased value to help fund his retirement. The taxpayer normally has income well below the threshold for this new tax. The taxpayer sells the rental and has a substantial gain. The gain from the rental sale gives the taxpayer a one-time windfall that pushes his income above the threshold for the new tax, and he ends up having to pay the regular capital gains tax plus an additional 3.8% tax on the appreciation that is attributable to the increase in value that occurred over several years.     

If this surtax will apply to you in 2013, you may need to increase your income tax withholding or estimated tax payments to cover the additional tax so you can avoid or minimize an underpayment of estimated tax penalty when you file your 2013 return.

Example: A taxpayer has owned a residential rental property for a number of years, planning to use the rental’s increased value to help fund his retirement. The taxpayer normally has income well below the threshold for this new tax. The taxpayer sells the rental and has a substantial gain. The gain from the rental sale gives the taxpayer a one-time windfall that pushes his income above the threshold for the new tax, and he ends up having to pay the regular capital gains tax plus an additional 3.8% tax on the appreciation that is attributable to the increase in value that occurred over several years.     

If your income normally exceeds the threshold for this new tax, or you have or are contemplating a large capital gain and would like to explore options to mitigate the impact of the tax, please give our office a call.

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Back-to-School Tax Tips for Students and Parents

Article Highlights

• Sec. 529 plans allow very large sums of money to be put away for a child’s college education with the earnings accumulating as tax-deferred and tax-free, if used for qualified college education expenses.
• Coverdell Education Savings Accounts allow $2,000 a year to be set aside for a child’s education. Earnings are tax-deferred and tax-free if used for qualified education expenses. Coverdell funds can be used for kindergarten through college education expenses.
• The American Opportunity education credit provides a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education.
• The Lifetime Learning credit provides up to 20% of the first $10,000 of qualifying higher education expenses per family per year.
• A deduction from gross income of up to $2,000 or $4,000, depending on income, for qualifying tuition and fees may be claimed for 2013, but the same expenses cannot be used for this deduction and education credits.
• Up to $2,500 can be deducted per year for qualified education loan interest.

Going to college can be a stressful time for students and parents. In recent years, Congress has provided a variety of tax incentives to help defray the cost of education. Some require long-term planning to become beneficial, while others provide current tax deductions or credits. The benefits may even cover vocational schools.

If your child is below college age, there are tax-advantaged plans that allow you to save for the cost of college. Although providing no tax benefit for contributions to the plans, they do provide tax-free accumulation; so the earlier they are established, the more you benefit from them.

• Section 529 Plans—Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless  of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education while maintaining control of the funds. The earnings from these accounts grow tax-deferred and are tax-free, if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 Plans are an excellent vehicle for college funding. Section 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. For 2013, you can contribute $14,000 without gift tax implications (or $28,000 for married couples who agree to split their gift). The annual amount is subject to inflation-adjustment. There is also a special gift provision allowing the donor to prepay five years of gifts up front without gift tax.
• Coverdell Education Savings Account—These accounts are actually education trusts that allow nondeductible contributions to be invested for a child’s education. Tax on earnings from these accounts is deferred until the funds are withdrawn, and if used for qualified education purposes, the entire withdrawal can be tax-free. Qualified use of these funds includes elementary and secondary education expenses in addition to post-secondary schools (colleges). This is the only one of the educational tax benefits that allows tax-free use of the funds for below college-level expenses. A total of $2,000 per year can be contributed for each beneficiary under the age of 18. The ability to contribute to these plans phases out when the modified adjusted gross income is between $190,000 and $220,000 for married taxpayers filing jointly, and between $95,000 and $110,000 for all others.
• Education Tax Credits—Two tax credits, the American Opportunity Credit (partially refundable) and the Lifetime Learning Credit (nonrefundable), are available for qualified post-secondary education expenses for a taxpayer, spouse, and eligible dependents. Both credits will reduce one’s tax liability dollar for dollar until the tax reaches zero. The credit is not allowed for taxpayers who file Married Separate returns.
• The American Opportunity Credit—is a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The credit is 100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 for a student attending college on at least a half-time basis. Forty percent of the American Opportunity credit is refundable (if the tax liability is reduced to zero.) This credit phases out for joint filing taxpayers with modified adjusted gross income between $160,000 and $180,000, and between $80,000 and $90,000 for others.   
• The Lifetime Learning Credit—is a credit of up to 20% of the first $10,000 of qualifying higher education expenses. Unlike the American Opportunity Credit, which is on a per-student basis, this credit is per taxpayer. In addition to post-secondary education, the Lifetime Credit applies to any course of instruction at an eligible institution taken to acquire or improve job skills. This credit phases out for joint filing taxpayers with modified adjusted gross income between $107,000 and $127,000, and between $53,000 and $63,000 for others. The credit is not allowed for taxpayers who file Married Separate returns.  

Qualifying expenses for these credits are generally limited to tuition. However, student activity fees and fees for course-related books, supplies, and equipment qualify if they must be paid directly to the educational institution for the enrollment or attendance of the student.

You may qualify for this credit even if you did not pay the tuition. If a third party (someone other than the taxpayer or a claimed dependent) makes a payment directly to an eligible educational institution for a student’s qualified tuition and related expenses, the student would be treated as having received the payment from the third party, and, in turn, pay the qualified tuition and related expenses. Furthermore, qualified tuition and related expenses paid by a student would be treated as paid by the taxpayer if the student is a claimed dependent of the taxpayer.

• Tuition and Fees Deduction—Up to $4,000 of qualified tuition and related expenses for higher education may be deducted as a direct reduction of income without having to itemize deductions. If your modified adjusted gross income (MAGI) is $65,000 or less ($130,000 or less if filing a joint return), the deduction is capped at $4,000, but if MAGI exceeds these amounts and is no more than $80,000 ($160,000 joint), the deduction is limited to a maximum of $2,000. If your MAGI is above $80,000 ($160,000 joint), or you file as Married Separate, no deduction is allowed. The same expenses cannot be used to qualify for one of the education credits and the tuition and fees deduction, and no deduction is allowed if the tuition and related expenses were paid with tax-free distributions of earnings from a Sec. 529 plan or a Coverdell education savings account. Unless extended by Congress, 2013 will be the last year that this deduction may be claimed.

• Education Loan Interest—You can deduct qualified interest of $2,500 per year in computing AGI. This is not limited to government student loans and this could include home equity loans, credit card debt, etc., if the debt was incurred solely to pay for qualified higher education expenses. For 2013, this deduction phases out for married taxpayers with an AGI between $125,000 and $155,000 and for unmarried taxpayers between $60,000 and $75,000. This deduction is not allowed for taxpayers who file married separate returns.

We all know that a child’s success in life has a great deal to do with the education they receive. You cannot start the planning process too early. Please call our office if you would like assistance in planning for your children’s future education.

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ACA Employer Letter (Employee Notification) Requirement

Article Highlights

•              Employers must give employees health care notification.

•              Affects employers with one or more employees and a gross income of $500,000 or more.

•              Notices due October 1, 2013.

•              New Employees must be notified within 14 days.

Beginning Oct. 1, any business with at least one employee and $500,000 in annual revenue must notify all employees by letter about the Affordable Care Act’s health care exchanges. The requirement applies to any business regulated under the Fair Labor Standards Act (FLSA), regardless of size. Going forward, letters are to be distributed to any new hires within 14 days of their starting date, according to the Department of Labor.

The Patient Protection and Affordable Care Act has a general $100-per-day penalty for non-compliance. Since this requirement is in the FLSA, concerns were raised in the business community that the $100-per-day penalty would apply to businesses that did not comply with the notification requirements.

On September 12, 2013, the Small Business Administration (sba.gov) posted a blog called “Myth #3: Business Owners Will Be Fined if They Don’t Notify Their Employees about the New Health Insurance Marketplace.” The article clarifies the policy, stating: “If your company is covered by the FLSA, you must provide a written notice to your employees about the Health Insurance Marketplace by October 1, 2013. However, there is no fine or penalty under the law for failing to provide the notice.”

The Department of Labor provides model notices for employers:

• Employers with plans: http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf
• Employers without plans: http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf

If you have questions, please give our office a call.

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Who Claims The Child?

Claiming a child can provide significant tax benefits. When couples divorce or separate, or even if the parents were never married, the question arises: who gets to claim the kids? 

This sometimes presents a nightmare for tax preparers. This is because often both parents will claim the same child, and in this modern era of e-filing, the first one to file and claim the child will be accepted for e-file and the second to file will be rejected regardless of who is rightfully entitled to claim the child. If the second parent to file is legally eligible to claim the child, then that parent must file a paper return and provide proof of eligibility to claim the child’s exemption. This sometimes requires an elaborate array of documentation and can be quite a pain.

Another leading cause of problems are family court judges who will award the child’s tax exemption to the parent who is not qualified to claim the child under federal tax law. Rulings by family court judges cannot trump federal tax laws.

So, who legally, according to federal tax law, is entitled to claim the child? Well, the Internal Revenue Code says the parent with whom the child resided for the longer period of time during the tax year gets to claim the child’s exemption. This seems simple enough, but some parents have joint custody and they begin counting time by the hour and minute. However, when it comes to determining with whom the child resided the longest, the IRS looks at the number of nights the child sleeps in each parent’s home. If that turns out to be an equal number of nights, the tax rules include a tiebreaker that gives the child’s exemption to the parent with the higher adjusted gross income (AGI).

However, a child is treated as the qualifying child of the noncustodial parent if the custodial parent releases a claim to the exemption to the non-custodial parent. The custodial parent can do this on an annual basis or for multiple years. However, the custodial parent should be cautious about releasing the exemption for multiple years. The release can be revoked but the revocation does not become effective until the tax year following the year the non-custodial parent was provided a copy of the revocation. The IRS provides Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, for this purpose.

A number of tax benefits are at stake by claiming the child, including:

• The child’s exemption that produces a $3,900 tax deduction in 2013. 
• A potential $1,000 child credit for children under the age of 17. 
• For children attending college, the education credit (up to as much as $2,500) goes to the parent who claims the child’s exemption regardless of who pays the tuition.
• For children under age 13 the parent that claims the child’s exemption is the one that gets to claim a tax credit for childcare expenses while working.
• Claiming a child under the age of 19 can substantially increase the earned income tax credit if the taxpayer otherwise qualifies. 
• Claiming a child can also help a single individual qualify for the more beneficial head of household filing status.

Caution: Some of the benefits phase out for higher income taxpayers. Where possible, parents should seek professional assistance to determine what makes sense financially for both parents. Please contact our office for additional information.

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Who Gets Your IRA

The designated beneficiary listed on your IRA account beneficiary form determines who gets your IRA. This is true even if your will or trust names different beneficiaries. You may have filled out that beneficiary form long ago and no longer remember who you designated as your beneficiary. Perhaps your family circumstances or marital status have changed. Whenever your family circumstances change, you need to review your beneficiary designations. You may have named an ex-spouse as your beneficiary and now may not want him or her to receive your IRA.

If you are recently remarried and want your IRA account to go to your children, your new spouse may have to sign a waiver of rights to your retirement benefits. Otherwise, the IRA might go automatically to your new spouse. This is also generally true for employer plan benefits.

If you have a trust and want the IRA proceeds to go to the trust, then you need to name the trust as the beneficiary. There is no tax advantage to naming a trust as the beneficiary of an IRA. Of course, there may be a non-tax-related reason, such as controlling a beneficiary’s access to the money; thus, naming a trust rather than one or more individuals to inherit the IRA could achieve that goal. However, that is not typically the case. Naming a trust as the beneficiary of an IRA eliminates the ability for multiple beneficiaries to maximize the opportunity to stretch the required minimum distributions (RMDs) over their individual life expectancies.

Worse yet is if your IRA does not have a designated beneficiary. When there is no beneficiary form on file, you are really rolling the dice. Your retirement assets will go to whomever the IRA trustee has named for you in the default language in the documents for the account.

When you fill out the beneficiary designation form, you have the opportunity to also designate one or more contingent beneficiaries who will inherit the IRA if the primary beneficiary has passed away before you do. For example, you could name your spouse as the primary beneficiary and your child and brother as next in line if your spouse pre-deceases you. This is a safety net of sorts in case you don’t get around to changing the primary beneficiary after that person passes away.

Don’t take chances; make sure your IRA beneficiary designations are up to date and correctly specify who you want to get your IRA in the event of your death. Call our office if you have any questions.

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Partnership, S-Corp and Trust Extensions End September

Article Highlights

• September 16 is the extended due date for partnership, S-corporation, and trust tax returns.
• Late-filing penalty for partnerships and S-corporations is $195 times the number of partners or shareholders during any part of the taxable year, for each month or fraction of a month.
• Late-filing penalty for trust returns is 5% of the tax due for each month, or part of a month, for which a return is not filed up to a maximum of 25% of the tax due.

If you have a calendar year 2012 partnership, S-corporation, or trust return on extension, don’t forget the extension for filing those returns ends on September 16, 2013.

Pass-through entities such as Partnerships, S-corporations, and fiduciaries (trusts, estates) pass their income, deductions, credits, etc., through to their investors, partners, or beneficiaries, who in turn report the various items on their individual tax returns. Partnerships file Form 1065, S-corps file Form 1120-S, and Fiduciaries file Form 1041, with each partner, shareholder, or beneficiary receiving a Schedule K-1 from the entity that shows their share of the reportable items.

If all of the aforementioned entities could obtain an automatic extension to file their returns on the same extended date as allowed to individuals, it would be difficult for individuals to meet the filing deadline without estimating the pass-through information and then later filing an amended return when the actual data was received.

To overcome this problem, the automatic extension period for partnerships and trusts is set at 5 months, thus providing individual taxpayers with a month’s grace period to complete their individual 1040 returns. The original due date for calendar year S-corporation returns was March 15, and they are allowed a 6-month extension period, making the due date for these returns also September 16. Thus, individual S-corp shareholders also have a month to finish up their individual returns.

An S-corporation or partnership which fails to file on time is liable for a monthly penalty equal to $195 times the number of persons who were partners, or shareholders for S corps, during any part of the taxable year, for each month or fraction of a month for which the failure continues. These penalties can be substantial.

Trusts are subject to a penalty of 5% of the tax due for each month, or part of a month, for which a return is not filed up to a maximum of 25% of the tax due.

If our office is waiting for some missing information to complete your pass-through return, we will need that information at least a week before the September 16 due date. The late-filing penalties are substantial, so please call this office immediately if there are anticipated complications related to providing the needed information so a course of action can be determined to avoid the potential penalties. 

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September 2013 Business Due Dates

September 16 - Corporations

File a 2012 calendar year income tax return (Form 1120 or 1120-A) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.

September 16 - S Corporations

File a 2012 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension.

September 16 - Corporations

Deposit the third installment of estimated income tax for 2013 for calendar year corporations.

September 16 - Social Security, Medicare and withheld income tax

If the monthly deposit rule applies, deposit the tax for payments in August.

September 16 - Nonpayroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in August.

September 16 - Partnerships

File a 2012 calendar year return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each partner with a copy of K-1 (Form 1065) or a substitute Schedule K-1.

September 16 - Fiduciaries of Estates and Trusts

File a 2012 calendar year return (Form 1041). This due date applies only if you were given an additional 5-month extension. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1.

Please call our office with any questions. 

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September 2013 Individual Due Dates

September 1 - 2013 Fall and 2014

Tax Planning Contact this office to schedule a consultation appointment. 

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September 10 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during August, you are required to report them to your employer on IRS Form 4070 no later than September 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

September 16 - Estimated Tax Payment Due

The third installment of 2013 individual estimated taxes is due. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include:

• Payroll withholding for employees;
• Pension withholding for retirees; and
• Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de-minimis amount, no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors:

• The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
• The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for higher-income taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception.

However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than the 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.

CAUTION: Some state de-minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.

Any questions please call our office. 

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