Archive for the ‘2012 Tax Information’ Category

Status of the Internet Tax

Friday, November 23rd, 2012

From the beginning of the internet era until the latter part of 90’s the internet was free from any directive from the US government on all aspects. The internet also remained free from any tax accountability, levies, license fees, imposts and duties. However, by the year 1996, the US government sees the growing internet services and decided that it could potentially be a massive source of revenue.

The Internet Tax Freedom Act was a US law and was signed on October 21, 1998 by Pres. Bill Clinton with aims to conserve and promote the educational, informational and commercial potential of internet usage. The law protects internet access from being taxed or imposing discriminatory internet only taxes. However, it does not exempt the sales transaction that was processed on the internet from taxation. Internet sales tax will be the same with the local sales tax. The act did not cancel any use tax or sales tax. The law has been extended three times by the US Congress since the first enactment. The latest extension was signed by Pres. George W. Bush and further extended the moratorium until November of 2014.

Forms of internet taxation include: Internet Access Tax, Telecommunications Tax, Bit Tax, Franchise Tax, Bandwidth Tax and Email Tax.

  • Internet Access Tax- is considered as service tax and is actually exempt on some states.
  • Telecommunications tax- is what some states would call the internet service wherein different ways of accessing the internet such as cable, wireless, satellite, etc. are usually subject to various levels of taxation.
  • Bit Tax – a lot of countries have presented a proposal that internet should be taxed by internet usage volume. The tax rate will rely solely upon the volume of the data transferred regardless of the content (whether it’s voice, images, videos or other content).
  • Franchise Tax – both localities and states have commonly levied franchise taxes on cable television operators and utilities. Before the approval of the Internet Tax Freedom Act, a lot of municipalities were analyzing the feasibility of extending the franchise taxes to the customers, ISPs or both.
  • Bandwidth Tax – advancement is the idea of bandwidth tax. The tax rate will be based on the speed of one’s internet connection that’s why it is banned in the internet tax freedom act.

 

Conceptual Issues about Internet Tax

Location Issue – There is no easy way to identify location, as there are basically no boundaries in internet usage. The web browsers can and regularly access their accounts everywhere, even from remote locations; internet providers are always situated in several different taxing jurisdictions. The data traffic through the internet’s packet-switched structure is directed towards numerous locations. This issue is significant not only because of the need to identify the incidence of the tax and its application but also because the law requires that the taxing sub jurisdiction or the state have connections with the transaction so that it can apply its taxing power and that identification solely rely on those considerations.

Product/good or Service Issue – If the internet access is determined to be a “service”, then no sales taxation should apply while if it determined to be a “good/product” the sales tax rate may vary.

Installation and monthly fee – In the US, taxing authorities and a few states make a distinction between the installation or the initial set up fee to get internet access from the per-minute, hourly and monthly fee for actual online access. For example in Nebraska, the state only taxes the initial set up if the software is provided and it doesn’t tax the monthly fee. Then in the state of Tennessee, there are taxes both for the initial set up and the monthly fee.

Collection issue – There is an issue whether the states should collect the tax themselves or shall they pass the burden of collecting the tax to the internet service providers.

The latest on internet taxation talks about how online consumers should get ready to pay more for the products and services that they will be purchasing. Both the Republicans and Democrats in Congress have agreed to support a bill that would provide sales authority to require Ebay, Amazon and other online shopping websites and companies to collect sales tax. Consequently, it would also require the online shoppers to shoulder the cost and increase the price of the purchases to 5 percent more than they shell out today. According to a report from The Wall Street Journal, the governors are excited for the new source of revenue to resolve the shortage of budget. These republican governors used to oppose the sales tax on internet purchases. Regardless of the shift in position when it comes to internet sales tax, the bottom line is the online consumers are the ones who will be affected as tax hike would mean increased prices on products and services.

A new definition of the term “internet access” was coined on the latest ITFA amendment. It means a service that allows the users to access information, electronic mail, content, and other services offered online and it may also provide access to proprietary information, content and other services as part of the subscription package provided to users. The term internet access would not include telecommunication services except to the level such services are used, sold or purchased by the internet provider to provide internet access.

The latest amendment on ITFA (or Internet Tax Freedom Act) states that the term “tax on internet access” pertains to the tax on internet access not considering if the tax is applied on an internet provider or an internet access subscriber. So this means that the local government and states cannot apply internet access tax on either the internet access provider or the individual internet subscriber. More over, the term “tax on the internet access” would not cover a tax gauged by net income, net worth, property value or capital stock. This means that internet access tax is a “consumption” tax and not a property “tax”. As the internet technology further advances, the ISPs may put together or package the internet subscription that would consist of the regular communication service and increase the monthly bill. If internet access is tax exempt then the regular communication access and services may also be tax free altogether. Then the government will lose around $12 billion per year.

Tips for Last Minute Tax Filers

Friday, November 23rd, 2012

It’s best to prepare far earlier before the deadline. It will save you from all the hassles of last minute filing and there would be an ample time for you to thoroughly check if all the indicated details are complete and accurate. However, given that there are inevitable circumstances that didn’t allow you to accomplish at a reasonable time prior to the tax filing deadline, here are several tips to get you through last minute filing:

JoycesTaxServices can help you with late filing issues!

  1. You can opt for electronic filing – This is the most convenient, safest and quickest way to submit your tax return that’s why it is used by almost 100 Million US taxpayers. There are e-file options that you can check on irs.gov website and you can pick one which is the most appropriate for you. If you are anticipating a tax refund, you are able to collect it sooner than when you opt for paper tax filing. Also, there is software utilized by service providers (that you can check on IRS e-filing section) that allows the user to recheck all the indicated information, you will receive an email notification if you have an error and directs you to make the correction. And finally, you can be assured that e-filing is safe because the IRS process e-filed tax returns over encrypted and secure lines. We recommend Drake Services. Ask Joyce for more information!
  2. Make sure it’s error free – You have to ensure the accuracy and completeness of the indicated information because it could affect your tax return as inaccuracy can postpone or decrease your tax refund. You have to be thorough in checking identification numbers or SS (Social Security), your dependents, spouse. Recheck your computation so that you can confirm you have the correct balance due or refund.
  3. Make sure you are mailing to the correct address – You can always go to the IRS website irs.gov – the IRS page for mailing addresses indicate the type of form that will be submitted and the corresponding address to which it should be mailed. The choice of address also depends on whether you will be enclosing payment or not. Commonly, if you are not enclosing a payment, then it should go to the Department of Treasury in Fresno CA, and it you are enclosing a payment, then it should go to the Internal Revenue Service in San Francisco CA.
  4. For IRA (Individual Retirement Arrangements) Contribution – Contributions can be accomplished to your customary IRA at any time within the year or on due date for submitting your tax file return for that particular year (which does not include extensions). To check if you are eligible for the full yearly IRA deduction in 2012, you can check http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits. Basically, it indicates that you can deduct your contribution if: First, you are not qualified to participate in a company retirement plan and Second, if you are eligible, you have less than a particular amount of AGI or adjusted gross income. For Single or head of household, the limit is $58,000 or less, for married filing jointly or qualifying widower the limit is $92,000 or less, for married filing separately, the threshold is amount less than $10,000
  5. You can file for an extension – If you are certain that you wouldn’t be able t file your taxes on time, you can always opt to file for an extension. If you failed to submit your federal income tax return by the due date, you can obtain a 6 month extension automatically by filing Form 4868 by the due date or deadline for filing your calendar year return which is usually on the 15th of April or fiscal year return. But you have to know that although IRS may grant a 6 month extension on filing, it doesn’t grant you 6 additional months to pay. You have to calculate your tax liability for 2012 and pay the amount that you owe when you file for extension. 22.5 percent is the maximum penalty for late filing and 25 percent is the penalty for late payment.
  6. Choose from few payment options
    IRS offers a few payment options: Debit or credit card, electronic funds transfer and check or money order. Logically, the electronic payment option is the most convenient and the fastest way to send your payment to the IRS. But if it is not feasible for you to send payment through these options, you can always opt to pay for check or money order. You just have to make sure it includes your information like name, phone number, address, SSN employer identification number. Make sure that you are sending to the correct address as well.
  7. Contact IRS if you can’t pay the taxes due – If you cannot pay full amount of taxes that you owe on the due date, submit your return on time and pay as much as you can to avoid interest and penalties. Than you can call IRS to check if there are alternatives or payment options available. If what you owe is less than $50,000, then there is OPA or Online Payment Agreement wherein you can request for additional time period to complete your payment. If you can’t complete your tax payment within 120 days, there is another option called IRS installment agreement. You have to accomplish an IRS form 9465-FS but you have to make sure that you have filed and completed your previous tax returns, then you also have to pay a $150 user fee, and you have to pay 4 percent of interest on the outstanding balance.
  8. Check IRS.gov – This government website provides all of the details of filing taxes. Forms and all tax information are available in this site as well.
  9. If all else fail, hire a CPA – If you are certain you won’t be able to accomplish tax filing on time. You can probably file for an extension first then you can hire a CPA and let a professional handle all the hassles for you. Although, you end up spending money for this service, think about all the time and effort that you can save. Especially if you are preoccupied with other important things.

Tips for Preparing Your Tax Return

Friday, November 23rd, 2012

Preparing your tax return can be overwhelming, especially for beginners. The most basic advice before even focusing on your state return is that you first have to make sure you can indicate complete and accurate information in your federal return. You can always call and hire a professional to do the work for you but preparing your own tax return means that you do not have to spend extra money. It is a great thing because nowadays there are a lot of options in preparing your tax return. You can choose from customary paper filing, utilizing software for a more organized tax preparation or preparing and submitting your tax return using the online processing.

You also need to organize a few documents before preparing for your tax return: 1.Financial records or documents – you need these to check on the amounts to indicate at each item of your tax return. Even if you hire a tax agent, you will still need your financial records. 2. You also need the tax file number. If you do not have a tax file number, then you are required to apply for one. Once you obtain the needed documents, you may now begin to work on your tax return, here are a few tips:

Make the necessary adjustments on the details from your federal return to your state income tax return. – You have to make sure that you make the adjustments on the information on your state income tax return. A few of these modifications will require addition, which are added back because of federal deductions that you may have subtracted that aren’t accepted on the income items or state return that are exempted from tax for federal purposes, but are processed on state income tax. Other modifications will be deductions, commonly from income items that are taxable under the law of the federal tax, but are exempted from tax under law of the state tax. A few of these deductions can also be deductions exclusive to state tax laws. The total amount of required tax return adjustments will be based upon the scope that the state conforms to the federal tax law.

What are the usual deductions? The customary deductions to federal tax income consist of: Contributions to the state’s 529 college savings plan, refunds on state income tax, retirement benefits and social security that are federally taxed, subtractions for federal income taxes if it applies in your state, and state lottery winnings.

What are the usual additions? The customary additions to federal tax income consist of: Moving expenses, municipal bonds from other state interests, depreciation of bonus and interest on student loan.

Determine your state tax accountability – After you have computed your taxable income, you have to determine your gross state tax accountability. A few states have a fixed rate for its residents regardless of the individual income. On the other hand, a lot of states have tax brackets with tax amounts that elevate as income also rises.

You have to compute the total tax due – After you have determined your tax accountability, you may deduct that by the credits of your state tax you are eligible for. The credits for state tax are different from one state to another but a lot of states have different versions of credits for child tax and credits for earned income. A lot of tax credits can only decrease your tax accountability to 0 but there are a few credits that are refundable tax, in other words, they are processed or treated as a tax payment with balance credit that will be refunded to you.

File your state income tax return – A lot of the tax payers prefer filing the tax return electronically because it’s secure, it’s convenient and it’s fast. But you can still opt for paper filing. Just make sure that you have the right address to send it to. You can check irs.gov for address information.

On getting the tax refund – The quickest way to collecting your tax refund is if you submit the Form electronically and have your tax refund sent straight to your bank account. When you opt for paper filing, it’s takes about one whole week for processing, exclusive of the mailing time. If you file electronically, the whole process normally takes just about 10-15 days.

Additional Quick Tips:

  1. Accuracy and completeness – Make sure that all of the information you are entering in the form are comprehensive and correct. Being organized, especially when it comes to your financial records, will make your life easier when it’s time to prepare for your tax return submission.
  2. Make sure that the forms are organized – Placing the pages of the form in order would make it convenient for you and for the IRS to go through and review.
  3. Avoid rounding off – This may indicate that you are not completely sure of the exact figures, therefore, giving the IRS a reason to audit you further.
  4. Be careful with your calculations – Make sure that you double check on your computed figures indicated in your tax return form. You have to pay attention to child tax credit and earned income tax credit – these are the figures that are prone to error.
  5. Make sure that you have signed the form – A lot of people think it’s trivial but one of the most important thing to do and the most frequent miscue (according to IRS) when preparing your tax return is signing the form.
  6. Prepare early, file and pay on time – A lot of people are tax procrastinators. But do not wait until the last minute to prepare for your tax return, you want to have more time to recheck and do some adjustments when necessary.
  7. If you’re certain you can’t file on due date, file for an extension – You can accomplish and submit Form 4868 to obtain extension and to avoid penalties for late filing.
  8. Always keep a copy of your tax return – Even after several years of filing your tax return, keep those for reference, you never know when you’re going to need it.

Restructuring of Michigan Tax Laws

Friday, November 23rd, 2012

The Michigan Tax Changes took effect on January 1, 2012. The legislation on the state tax reform was signed by Governor Rick Snyder on May 25, 2011. It is the largest Michigan tax revamp in almost 2 decades that funds the eradication of the Michigan Business Tax with a number of restructuring to the individual income tax. Snyder claims that the MBT had to be eliminated because it abolished jobs in Michigan. A 6% tax on the earnings of 40,000 firms doing business in the state that file a federal corporate income tax form will replace MBT.

Here is the list of the changes that were made with the taxes in the state of Michigan:

ON RETIREMENT BENEFITS/PENSION:

Essential income tax restructuring is effective for 2012 tax year. There is no alteration in 2012 in the tax processing of retirement and pension benefits for tax payers who were born prior to 1946. Beneficiaries who were born during the year 1946 until 1952 are entitled to retirement benefits and deduct pension up to $20,000 for single tax payers or married couples that are filing separately or $40,000 if married couples are filing a joint tax return. Beneficiary born after 1952 may not deduct retirement benefits and pension on Michigan Income Tax return. What determines the age category for joint filers is the age of the older spouse.

On Pension Withholding

Withholding is mandatory on pension benefits that are taxable. Pension administrators should adhere to directions from beneficiaries on any MI W-4P obtained. If you accepted a MI W-4P from a beneficiary who has checked box 3, calculate the tax amount withheld by utilizing the direct percentage computation. The withholding rate is 4.35% of any pension or retirement benefit that is taxable. The taxable part is determined by deducting any personal exemption allowance and any pension deduction. If there is no MI W-4P, the pension administrators have these options: First, they should not withhold on the benefits that are given to the beneficiaries that were born prior to 1946 unless the benefits is greater than private pension limitations. And second, if the beneficiary was born in 1946 onwards, the admin should withhold all pension distributions that are taxable at 4.35% Monthly deduction amounts that are non-taxable are: For single recipient pension deduction, the amount is $1,666.67, for married recipient pension deduction, the amount is $3,333.33 and for personal exemption allowance, the amount is $308.33.

ON CORPORATE INCOME TAX

Corporate Income Tax or CIT that was approved May 25, 2011 replaces the Michigan Business Tax, except for those firms that want to maintain certificate credits. Here are the details of CIT.

The Corporate Income Tax consists of 3 different taxes, the corporate income tax, franchise tax on financial institutions and premium tax on insurance firms. The CIT is applicable only to C corporations and units that are taxed as C corporations for federal income tax purposes. The CIT is not applicable to flow through entities and individuals, partnerships, trusts and S corporations although withholding might be allowed with flow through entities.

CIT will be applicable to tax payer that is connected to the state and has physical presence in MI for over a day during the tax year, or if the tax payer collects sales in MI and has MI gross receipts of over $350,000, or the tax payer has beneficial interest or possession in a flow through entity that has nexus with the state of Michigan.

Corporate Income Tax is equivalent to 6 percent of the CIT tax base after allotment or allocation. The CIT tax base of a tax payer whose business actions are subject to tax within the state is allocated to MI utilizing a 100 percent sales factor. Small business alternative credit is the one thing that is available under Corporate Income Tax.

ON HICA (Health Insurance Claims Assessment) ACT

Along with the other Michigan tax law restructuring, is the HICA act wherein health insurance carriers, third party administrators, and self ensured units are obligated to pay an assessment on particular health care claims. All imbursement under the health insurance claims assessment act will be forwarded to the Michigan Department of treasury by EFT or Electronic Funds Transfer. Payments will be made quarterly starting on April 30th, July 30th, October 30th and January 30th. One must accomplish and submit the Form 4926 so that you can be registered to make payments electronically through EFT. The processing of Electronic Funds Transfer Application under Health Insurance Claims Assessment to treasury may take 4 weeks. An annual return is needed to be submitted utilizing an online boundary to e-file straight to Treasury.

SUMMARY OF THE TAX CHANGES

On Tax Rate

The decrease in tax rate from 4.35 percent – 4.25 percent was postponed until the first of October 2012. 4.33 percent is the 2012 annualized yield and it is applicable to all of 2012 not considering when the earning was collected. On 2013 onwards, the tax rate will be 4.25 percent.

On Deductions

Miscellaneous deductions like charity games, political aid or donations, charitable offerings from retirement plans or prizes won in state regulated bingo are no longer applicable. Also, the deductions for reinvestment of profit from the Michigan Strategic Fund investments are no longer applicable as well. Deduction on Renaissance Zone for zones that are renewed or certified after the 31st of December 2011 is no longer applicable.

On Exemptions

The individual exemption was raised from $3,700 to an annualized individual exemption of $3,763 for 2012. On 2013 onwards, the personal exemption is $3,900. For children 18 years old and below, the $600 exception as well as the special exemption for unemployment compensation that is more than 50 percent of the adjusted gross income no longer applies.

On Credits that are Non-refundable

The credit for contributions to medical savings account, the credit for contributions to food banks, homeless shelters and community foundations, the credit for city income taxes, the credit for donations to Family Development Program, and the credit for public contribution are all no longer applicable.

Restructuring of Michigan Tax Laws

Wednesday, November 21st, 2012

The Michigan Tax Changes took effect on January 1, 2012. The legislation on the state tax reform was signed by Governor Rick Snyder on May 25, 2011. It is the largest Michigan tax revamp in almost 2 decades that funds the eradication of the Michigan Business Tax with a number of restructuring to the individual income tax. Snyder claims that the MBT had to be eliminated because it abolished jobs in Michigan. A 6% tax on the earnings of 40,000 firms doing business in the state that file a federal corporate income tax form will replace MBT.

Here is the list of the changes that were made with the taxes in the state of Michigan:

ON RETIREMENT BENEFITS/PENSION:

Essential income tax restructuring is effective for 2012 tax year. There is no alteration in 2012 in the tax processing of retirement and pension benefits for tax payers who were born prior to 1946. Beneficiaries who were born during the year 1946 until 1952 are entitled to retirement benefits and deduct pension up to $20,000 for single tax payers or married couples that are filing separately or $40,000 if married couples are filing a joint tax return. Beneficiary born after 1952 may not deduct retirement benefits and pension on Michigan Income Tax return. What determines the age category for joint filers is the age of the older spouse.

On Pension Withholding

Withholding is mandatory on pension benefits that are taxable. Pension administrators should adhere to directions from beneficiaries on any MI W-4P obtained. If you accepted a MI W-4P from a beneficiary who has checked box 3, calculate the tax amount withheld by utilizing the direct percentage computation. The withholding rate is 4.35% of any pension or retirement benefit that is taxable. The taxable part is determined by deducting any personal exemption allowance and any pension deduction. If there is no MI W-4P, the pension administrators have these options: First, they should not withhold on the benefits that are given to the beneficiaries that were born prior to 1946 unless the benefits is greater than private pension limitations. And second, if the beneficiary was born in 1946 onwards, the admin should withhold all pension distributions that are taxable at 4.35% Monthly deduction amounts that are non-taxable are: For single recipient pension deduction, the amount is $1,666.67, for married recipient pension deduction, the amount is $3,333.33 and for personal exemption allowance, the amount is $308.33.

ON CORPORATE INCOME TAX

Corporate Income Tax or CIT that was approved May 25, 2011 replaces the Michigan Business Tax, except for those firms that want to maintain certificate credits. Here are the details of CIT.

The Corporate Income Tax consists of 3 different taxes, the corporate income tax, franchise tax on financial institutions and premium tax on insurance firms. The CIT is applicable only to C corporations and units that are taxed as C corporations for federal income tax purposes. The CIT is not applicable to flow through entities and individuals, partnerships, trusts and S corporations although withholding might be allowed with flow through entities.

CIT will be applicable to tax payer that is connected to the state and has physical presence in MI for over a day during the tax year, or if the tax payer collects sales in MI and has MI gross receipts of over $350,000, or the tax payer has beneficial interest or possession in a flow through entity that has nexus with the state of Michigan.

Corporate Income Tax is equivalent to 6 percent of the CIT tax base after allotment or allocation. The CIT tax base of a tax payer whose business actions are subject to tax within the state is allocated to MI utilizing a 100 percent sales factor. Small business alternative credit is the one thing that is available under Corporate Income Tax.

ON HICA (Health Insurance Claims Assessment) ACT

Along with the other Michigan tax law restructuring, is the HICA act wherein health insurance carriers, third party administrators, and self ensured units are obligated to pay an assessment on particular health care claims. All imbursement under the health insurance claims assessment act will be forwarded to the Michigan Department of treasury by EFT or Electronic Funds Transfer. Payments will be made quarterly starting on April 30th, July 30th, October 30th and January 30th. One must accomplish and submit the Form 4926 so that you can be registered to make payments electronically through EFT. The processing of Electronic Funds Transfer Application under Health Insurance Claims Assessment to treasury may take 4 weeks. An annual return is needed to be submitted utilizing an online boundary to e-file straight to Treasury.

SUMMARY OF THE TAX CHANGES

On Tax Rate

The decrease in tax rate from 4.35 percent – 4.25 percent was postponed until the first of October 2012. 4.33 percent is the 2012 annualized yield and it is applicable to all of 2012 not considering when the earning was collected. On 2013 onwards, the tax rate will be 4.25 percent.

On Deductions

Miscellaneous deductions like charity games, political aid or donations, charitable offerings from retirement plans or prizes won in state regulated bingo are no longer applicable. Also, the deductions for reinvestment of profit from the Michigan Strategic Fund investments are no longer applicable as well. Deduction on Renaissance Zone for zones that are renewed or certified after the 31st of December 2011 is no longer applicable.

On Exemptions

The individual exemption was raised from $3,700 to an annualized individual exemption of $3,763 for 2012. On 2013 onwards, the personal exemption is $3,900. For children 18 years old and below, the $600 exception as well as the special exemption for unemployment compensation that is more than 50 percent of the adjusted gross income no longer applies.

On Credits that are Non-refundable

The credit for contributions to medical savings account, the credit for contributions to food banks, homeless shelters and community foundations, the credit for city income taxes, the credit for donations to Family Development Program, and the credit for public contribution are all no longer applicable.

Michigan Individual Income Tax Changes for 2012

Wednesday, November 21st, 2012

A legislation restructuring the Michigan Income Tax Act was signed by Governor Rick Snyder. The income tax returns that were due in April 2012 were not affected by the amendment as the legislation will have an impact on those returns that are due next year, April 2013.

If these tax amendments work as the governor and republican lawmakers anticipate they do, it could balance the tax load more reasonably between retirees and the younger employees while also assisting to maintain and to increase job opportunities and decrease the state of Michigan’s high unemployment rate that in November dropped under double digits for the first time in several years. Some are actually concerned that the tax amendments might seize money from the state programs and public education that is around $2 Billion payment made by businesses in Michigan in the past. Some also worry that even if firms hire more employees, the rise in economy could be disregarded by the increase in income tax bills that the tax payers have to make. By 2013, individuals from Michigan will be paying around $1.4 Billion in income taxes more than the amount that they pay prior to this amendment.

The Restructuring of Michigan’s individual income tax that has taken place since January 1, 2012 definitely obtained a lot of attention, especially on the modification to the pension exclusion. Considering all the inquiries around the restructuring to the exclusion of pension, some of the details or important information about the law changes in Michigan should be highlighted:

  1. Tax payers who were born prior to 1946 should continue to have the same processes of retirement and Social Security earning as in prior law, and may still claim the individual exemptions for which they are qualified.
  2. Tax payers who were born from 1946 to 1952 are also allowed to take exemptions of $20000 for single, then $40000 for married (joint return filing) against retirement income until they reach the age of 67 years old when they may obtain the same exemption amount on all types of income.
  3. Tax payers who were born after 1952 are not subject to exemption for retirement income until they reach the age of 67, except for the Social Security exemption.

The state of Michigan has allocated a budget for a number of amendments to the personal income tax and homestead property tax code which will affect the retirement incomes that older tax payers depend upon. While tax payers are advised to have a word with the professionals about these tax law changes and its impact on their circumstances. More detailed information is indicated in this article that will hopefully help in understanding the income tax changes better.

  • Social Security for recent retirees, military pension and active duty military pay continue to be completely exempt from the state income tax.
  • The particular $2300 exemption for tax payers age 65 and above has been removed. The elimination of this exemption will cost tax payers who pay personal income tax around $100 more in income tax ($2300 multiplied by 4.35 percent)
  • The $3700 personal exemption for all individual tax payers will be eliminated for those with household resources from $75000 to $100000 for single tax payers and $150000 to $200000 for married couples. The full tax rate of this exemption $160.95 which is $3700 multiplied by 4.35 percent. Resources include disability and other costs.
  • The present exemption for earning from interest, capital gain and dividends ($10058 for single and $20115 for joint) will continue for adults who were born prior to 1946.
  • Depending on the value of the property, the Homestead Property Tax Credit will fall more or less 40 percent or $200 per year for median income households or those with $31354 total annual income. Those household with earnings above $50000 will no longer be qualified to obtain the credit.
  • The credit for contributions to medical savings account, the credit for contributions to food banks, homeless shelters and community foundations, the credit for city income taxes, the credit for donations to Family Development Program, and the credit for public contribution are all no longer applicable.
  • Those credits that are refundable and non-refundable and miscellaneous deductions from income are removed, such as charity game prizes, city income tax credit, political contributions and qualifying distributions from a retirement or pension plan that is given to a charity

What is the impact of the pension tax on 3 age categories – Those under age 67 and above, age 60 to 66 and age 59 and below?

For individuals age 67 and above – Both private and public pensions for senior adults age 67 and above continue the tax treatment prior to the 2012 tax amendment. Public pensions remain completely exempt while private pensions are exempt up to $45120 for single and $90240 for married (joint) as per law. The rise in 2012 tax is the result of the eradication of the $2300 senior exemption and the elimination of the $3700 personal tax exemption at higher levels of income. Military pensions and Social Security remain exempt from the income tax.

For individuals age 60 to 66 – Early pensioners will notice an increase in their pension tax in 2012. Public pension under this age range will be taxed, under the Michigan tax law amendment, tax payers with minimum income levels exempt from taxation will be cut from $45120 to $20000 for single tax payers and from $90240 to $40000 for married (joint). The personal exemption of $3700 will be removed at higher levels of income. Again, under this age range, military pensions and Social Security are exempt from the income tax.

For individuals age 59 and below – The younger pensioners age 59 and below will not obtain benefits from pension exemptions for 2012 until they turn 67 years old. The personal exemption of $3700 will be eliminated at higher levels of income. Only the military pensions are exempt from the income tax if the individual is below 60 years old.

Michigan Business Tax Underpayment Penalty

Wednesday, November 21st, 2012

Before discussing the Michigan Business Tax Underpayment Penalty, let’s review the basic information about the Michigan Business Tax. MBT was implemented in 2008, replacing the SBT which is Single Business Tax. The Michigan Business tax, manufacturers and small business owners are encouraged to make an investment in the state through several tax credits and a decrease in the total tax liability.

Michigan Business Tax will depend on gross receipts and business income, and an additional surcharge. It also consists of several incentives and tax credits. This tax reform also drastically decreased property taxes that generated particular exemptions for commercial, personal and industrial property. Development or expansion of small businesses are pushed by MBT wherein a small businesses with gross receipts f $350,000 and below do not have to pay any tax or file a tax return. Other credits are present for smaller businesses in Michigan. The business income tax is evaluated on business activity that transpires in the state of Michigan. The tax base begins with a comparable gauge of income partnerships and S corporations or federal taxable income and the tax rate is 4.95 percent.

The company’s gross receipts will be the basis of the Modified Gross Receipts Tax, decrease purchases from other companies. Purchases from other companies consists inventory purchased within the tax year, certain supplies and materials and capital expenditures. There is a 0.8 percent tax rate. There is a particular provision that decreases the tax base for several tax payers like self-employed individuals, auto dealers, members of limited liability firms and partnerships and construction contractors. A fraction of particular taxes collected by a business are integrated in gross receipts until 2012. A surcharge is applicable to the allocated business gross receipt tax and income tax before credits and the rate is 21.99 percent.

Now that we have discussed about the basics of Michigan Business Tax, we can proceed to discussing the penalty and interest computation for tax payers who underpaid, or those who filed and paid the tax late.

Taxpayers can accomplish and submit Form 4528 to address and compute the penalty and interest of late filing, late payment or underpaying the tax. If the tax payer fails to accomplish the form, the Department of Treasury will calculate those penalties and interests that will apply and bill the tax payer.

Estimated payments and returns are obligatory from any tax payer who anticipates an annual Michigan Business Tax liability of greater than $800. If a tax payer is liable for an estimated tax and the estimated return with full imbursement is not submitted or is filed late, the penalty is an additional 5 percent of the total tax due for the first 2 months. Penalty accumulates by 5 percent every month, or a portion thereof, after the 2nd month to a max of 25 percent. If the tax payer failed to comply with estimated tax payments and none of the exceptions (which will be discussed in the next paragraph) are applicable, calculate the penalty for not filing and the interest due.

Below is the list of the exceptions and if any of these circumstances apply, then you do not need to pay the interest or penalty.

  • The annual tax on the present annual return is $800 or below.
  • The estimated payments that are made quarterly and the sum of all payments equals to 85% of the annual liability.
  • The total of estimated payments equals the annual tax on the previous year’s return, given that these payments were accomplished in 4 equal payments on time. Or 12 equal payments if paid on Sales, Use and Withholding returns and the previous year’s tax amount is $20,000 and below. IF the previous year’s tax liability was estimated for a period less that 1 year or 12 months, this rate must be annualized.

Here is the breakdown of the details of Form 4582 or Michigan Business Tax Penalty and Interest Computation for Underpaid Estimated Tax

  1. Estimated Tax Required – this portion requires that the tax payer enters 85 percent of the annual tax rate, the due date for each quarterly return, estimated tax for each quarter, the actual quarterly tax, and the total amount paid.
  2. Figuring Interest – The tax payer can compute the interest due for either underpayment or non filing of the required estimated tax in this portion of the form.
  3. Figuring Penalty – This portion requires the tax payer to compute for either underpayment or non filing of the required estimated tax.
  4. Annualization Worksheet – this portion significantly directs the tax payer through the process necessary to compute the actual MBT total due for the tax year to date. The tax liability is annualized and multiplied by the percentage of estimated payment due for that particular quarter.

How to Avoid Penalties and Interest in MBT

If the Michigan Business tax liability is $800 and above the tax payer must submit estimated quarterly returns and payments. The tax payer can opt to make payments through:

  1. Accomplishing Form 4548 (MBT Quarterly Return)
  2. Accomplishing Form 160 (Combined Return for Michigan Taxes) – if registered for Sales, Use and Withholding taxes.
  3. EFT or Electronic Funds Transfer

If filing every month utilizing Form 160, monthly payments may be made on the 20th day of the month. If the tax payer opted for quarterly payments using Form 160, MBT payment is due on the 15th. For tax payers who chose to pay through EFT, wherein there is no need to file for Form 160, MBT payments can be made every 20th day of the month next to the month’s end. You have to take note that debit transactions will not be eligible for EFT if the bank account that is utilized is funded by a foreign bank account. You have to contact your bank to confirm the status of your bank account.

The estimated MBT for the quarter should also approximate the liability for the quarter. The approximated payment made with every quarterly return should be the total approximated Modified Gross Receipts Tax and Business Income Tax for the quarter with additional surcharge or 25% of the approximated annual liability.

What are the Federal Income Tax changes for 2012?

Wednesday, November 21st, 2012

Every year, there are modifications to tax laws that make significant impact. We all have to be aware of the details these amendments so we can plan our finances or take advantage of these changes.

2012 FEDERAL INCOME TAX BRACKETS

Marginal tax 

Taxable income

Single

Married filing jointly

10%

$8,700 or less

$17,400 or less

15%

Over $8,700 but not over $35,350

Over $17,400 but not over $70,700

25%

Over $35,350 but not over $85,650

Over $70,700 but not over $142,700

28%

Over $85,650 but not over $178,650

Over $142,700 but not over $217,450

33%

Over $178,650 but not over $388,350

Over $217,450 but not over $388,350

35%

Over $388,350

Over $388,350

Source: IRS

There is a lower tax rate for children

For 2012, children under 19 years old are not required to pay federal income tax on the first $950 of unearned income (i.e. interest or capital gains). The tax that will be applied to them on the next $950 will be based at their own rate – 0 percent for long term capital gains and 10 percent on the other unearned income. On the other hand, it will be taxed at the parents’ tax rate on unearned income that is over $1900. This will be no difference with full time college students who are age 24 and below except when their earnings exceed one half of their parents’ support. Individuals who are 19 and older who are dependent full time college students pay their taxes at their own rate. If the individual belongs to the 15% bracket or below, there will be 0% tax on the long term capital gains eligible dividends through 2012.

There is an increase in the Federal Withholding Allowance for 2012 .Withholding allowances for the individual and the dependents increases up to $3800.

FICA or Federal Insurance Contributions Act Tax

Federal Insurance Contributions Act Tax (FICA tax) has the authority to collect payroll taxes for Social Security benefits. The income base limit for Social Security (Survivors, Old age and OASDI or Disability Insurance) withholding was elevated to $110100. Usually, there would be a maximum of $6826.20 employee withholding at 6.2 percent, but congress has extended decreased Social Security withholding at 4.2 percent for the first couple of months of 2012. The income base for Medicare withholding stays unlimited for employee tax rate of 1.45 percent, yet based on the present health care reform legislation would elevate by 0.9 percent to 2.35 percent in 2013 for amounts that exceeds $200,000 for single tax payers or $250,000 for married filing jointly. Furthermore, an extra 3.8 percent surcharge would be applicable to investment income tax payers with AGI exceeding $200,000 for single or $250,000 for married filing jointly.

2012 Standard Deductions

As reported by the IRS, it is estimated that 2 out of every 3 tax payers obtain the standard deduction on their income tax returns. This year (2012), there is a change to the standard deduction amounts for all the tax payers: For Single tax payers – $5950, there is an increase of $150, for married tax payers (filing separately) – $5950, there is an increase of $150, for head of household – $8700, there is an increase of $200 and married tax payers (filing jointly) or qualifying widow widower – $11900, there is an increase of $300

Increase in Earned Income Credits in 2012

The earned income credit is applicable to working tax payers who have earned income dropping below particular thresholds. Qualification threshold is based on the quantity of persons in each family. The 2012 thresholds to qualify for this credit are: No children – the earning must be below $13,980 or $19,190 if married (filing jointly). One child – the earnings must be below $36,920 or $42,162 if married (filing jointly). Two children – the earnings must be below $41,952 or $47,162 if married (filing jointly). Two or more children – the earnings must be below $45,060 or $50,270 if married (filing jointly)

Also the tax credits have also elevated in 2012 along with the maximum credits: No children – $475, one child – $3,169, two children – $5,236 and three or more children – $5,891

Retirement Accounts Contribution

Contribution limitations for 401k and also 4403b plans elevated by $500 to $17,000 in 2012. Catch up contributions stay at $5,500, contribution limitations to the usual retirement plans remain at $11,500 as well as to catch up contribution limitation of $2500 Even if this contribution limitation can be altered for inflation, it has not elevated for the past 3 years. The income limitations for tax payers that are prepared to contribute to traditional IRA and the Roth IRA plans elevated slightly once again in 2012. The wage phase out threshold for Roth IRA begins at $173,000 for those joint filing returns and that is an increase of $4,000. Phase out threshold for tax payers submitting their tax return as single or head of the household is not $110,000 that is a $3,000 elevation from the last year’s rate.

If you are qualified for a retirement plan at work and you are thinking about contributing to a tax deductible traditional IRA, the 2012 income phase out limitation begins at $92,000 for joint filers wherein there is an elevation of $2,000 from the previous year and an increase to $58,000 for the tax payers with filing status of head of household or single, there is an increase of $2,000 from the previous year.

Exemption Rate

The rate or the amount that you can subtract for every exemption claimed on a federal income tax return in 2012 also increased from the 2011 value. The year’s exemption of $2800 represents a $100 increase from the previous year’s amount.

Exemption from the AMT (Alternative Minimum Tax)

Congress increased the income exemption rate to $72,250 for married couples (filing jointly) and $48,450 for single tax payers for 2011 tax year. It is highly possible that the Congress will increase the limits again for 2012 tax year and make the yearly adjustment permanent.

 

 

What is the Michigan Business Tax?

Wednesday, November 21st, 2012

Prior to Michigan Business Tax (MBT), there is Single Business Tax (SBT) that was in effect since 1976. SBT applied a modified VAT or Value Added Tax, and it focused more on the ‘benefits obtained’ for the tax payers as opposed to ‘ability to pay’ standard. But eventually the SBT was abolished because of the following reasons – The method of adding VAT led to negative insight – as the individuals are used to deducting from the base not adding to it. Also, companies lost. SBT was also blamed for the declining Michigan economy during that time and it also gave the impression that Michigan requires unreasonably high business taxes.

Michigan Business Tax replaced SBT and it has the following features:

  1. New tax base of gross receipts less purchases and income balances and shift a portion of the weight of the capability to pay (income) while keeping an established base.
  2. Significant personal property tax assistance tackles a major business distress.
  3. MBT tax credits offer incentives to firms so they will be encouraged to invest in the state, consequently bringing more jobs for the residents, and to carry out development and research in the state of Michigan.
  4. There are particular conditions to decrease tax liabilities for small business to assist them to develop.

Under MBT, the general tax base has modified gross receipts taxed at 0.8 percent and the business income is taxes at 4.95 percent. Insurance companies are taxed at 1.25 percent on direct premiums and other financial institutions have a franchise tax at 0.235 percent on net capital.

MBT Apportionment

Both the Modified Gross Receipt Tax and the Business Income Tax are allocated to MI based on sales. The apportionment aspect equals a business’ sales in the state of Michigan divided by the total sales in all locations. There are no throwback sales in MBT and the sales are traced to another state if that state has authority to tax even if that state doesn’t commonly do so.

Modified Gross Receipts Base

Under MBT, the Modified Gross Receipts Base is the tax payers gross receipts less purchases from other companies prior to apportionment. “Purchasing from other companies” means the inventory obtained within the year, it also pertains to assets that are depreciable within the year and it also refers to the supplies and materials, including fuel, parts and repairs.

Business Income Tax Base

Under MBT, Business Income tax Base’s starting point is the federal taxable income from business activity. It includes non-corporate firms and unitary groups.

Unitary groups file a combined tax return, while adding tax bases of members of the unit and applies combined apportionment percentage. Insurance companies, financial institutions and operating units cannot participate in unitary groups.

Insurance Company Tax

Instead of either business income taxes and modified gross receipts. Insurance company tax has a 1.25 percent gross direct premiums applied to property or risk located in the state of Michigan. There is no apportionment as only premiums on property and Michigan risks are taxed.

Financial Institution Tax

Under MBT, financial institution tax is restricted to thrift banks, savings and loans, and banks. It is also limited to firms possessed directly or indirectly by a financial organization, and financial institution tax is also limited to a unitary business set of these units.

Personal Property Tax Relief

Exemptions under personal property tax relief include 12 – 24 education mills, averaging to 23% cut on commercial personal property. There is a 35 percent credit that is refundable for the outstanding industrial personal property tax for those that are exempt from 24 education mills and firms. MBT also offers a personal property tax decrease of 65% on average for industrial property. By allocating a portion of the MBT to the school aid fund, schools in general are protected. There are no reductions to the village, township, city and county property taxes and this decreases the burden on mobile capital.

Special Provisions for Small Businesses

Small business or companies that have $350,000 or below gross receipts are tax exempted. There are absolute tax liability set up for $350,000 – $700,000 in gross receipts via credit. MBT also allows eligible companies to pay 1.8 percent on adjusted business taxable income and increases alternate tax officer payment disqualifier removed to $160,000 – $180,000. Double gross receipts remove to $19 – 20 million. To entice or encourage business owners to invest in Michigan, MBT offer business credit.

Credits Provided by MBT:

  1. Investment Tax Credit – this is for 2.9 % of Michigan investment
  2. Compensation Credit – this is for 0.37 % of Michigan investment
  3. R and D Credit – this is for 1.9 % of Michigan research and developments costs.

The total sum of investment and compensation credit cannot be greater than 52 % of MTB liability and the total sum of the 3 credits cannot be more than 65 % of the MTB liability.

Surcharge on MTB

Under MTB, the surcharge is 21.99 percent of tax before credits. All of the major credits have been decreased. Changes are estimated $100 million tax decrease in FY 08, income neutral in regards to substituting service tax. For financial institutions, the surcharge is 27.7 percent for 2008 and 23. This is a 4 percent from 2009 onwards. Also, there will be no surcharge on insurance company tax and the surcharge expires in 2017.

The entities that will pay more under MBT are the profitable firms, FIRE, companies that operate in MI but have small property or payroll and companies without much personal property. On the other hand, those that will pay less under MBT are small businesses with $10 – $20 million of gross receipts, also small businesses below $10 million with income to owners above $115,000, manufacturing companies and Michigan multi-state companies.

MBT has a prompt to make sure that it would not represent a huge tax elevation. If revenues go over the trigger, 60 percent of the excess are refunded to the tax payers and 40 percent will be deposited to BSF.