IRS Treatment of Same Sex Marriage For The Modern Family

One of the more popular shows on televisions is Modern Family.  For those of you who have not seen it, the comedy revolves around three interrelated households facing the trials and tribulations of "modern" life.  One of the households belong to Cam and Mitchell, two same-sex partners who have adopted an adorable little girl from Vietnam.  Now, while plotlines featuring them tend to be quite amusing, I can understand that how Cam and Mitchell file their taxes is probably not at the forefront of most viewers' minds.  However, a recent decision by the Internal Revenue Service regarding its treatment of same-sex couples actually made me consider the notion.

The IRS has recently decided that, for federal tax purposes, it will recognize a same-sex marriage if it is valid where the marriage was entered into, regardless of where the couple actually resides.  This means that even though same-sex unions are not recognized in Pennsylvania, a same-sex couple living in Pennsylvania can be deemed married by the IRS as long as they obtain their marriage in another state where same-sex unions are legally recognized.

This means that legally married same-sex couples will be able to file their 2013 federal income tax returns using either the married filing jointly or married filing separately designations. In addition, they will also be able to file amended returns for prior tax years choosing to be treated as married during those years, as long as those years follow the date of the legal marriage. This treatment will be applied to all federal taxes, including estate, gift and generation skipping taxes. 

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Property Taxes, Assessments, Appeals and Appraisals

Do you think you're paying too much in real estate property taxes?  Other than lobbying your school board, municipal leaders and county commissioners, there is not much you can do about the millage rate.  It may be time to review and possibly appeal your property assessment. 

Once a year, Lancaster County provides taxpayers the opportunity to challenge their assessment.  The deadline for filing is August 1.  You may need an appraisal to support your argument that your assessment is too high.  The time to get that is now.  Supporting appraisals should be submitted no later than August 15. 

See my blog from last year to help you determine whether filing an assessment appeal makes sense for you. Generally, if you can prove that the fair market value of your property is less than 1.27 times your assessment, an appeal has merit.  (Although the common level ratio will change July 1, you can still utilize the 1.27 factor for the purpose of making projections.) 

If you have questions, or need to connect with an appraiser who is familiar with the assessment appeal process, please call or email us, but do so soon so that we can get your appeal in under the August 1 deadline.

Christina Hausner is an attorney at Russell, Krafft & Gruber, LLP in Lancaster, PA. She received her law degree from Duquesne University School of Law and practices in a variety of areas.

Adoption Tax Credit Survives Fiscal Cliff

There is good news for taxpayers who have recently adopted a child or are planning to adopt a child in the near future: the adoption tax credit, which I have discussed in previous posts, has survived the fiscal cliff. The American Taxpayer Relief Act of 2012, which was passed by Congress and signed by President Obama on January 1, 2013, permanently extends the adoption tax credit. 

In general, the credit allows parents to apply the ordinary and necessary expenses involved with adoption, including attorney fees, travel expenses, adoption fees and court costs, against their federal tax liability. Because the maximum amount of the applicable credit is indexed for inflation, the amount changes from year to year. For 2012, the maximum credit is $12,650 per adopted child.

There are, however, some income restrictions. The tax credit begins to phase out at income levels that reach $189,710. Any taxpayer with an adjusted gross income over $229,710 is prohibited from utilizing the credit.

One potentially negative change is that the credit is no longer “refundable”, which means that it can only be applied toward existing tax liability. For example, if your tax liability for 2012 is $8,000, the credit can be used against that entire amount. However, because the credit is not refundable, the taxpayer will not receive a refund of the additional $4,650 that the credit provides for. If the credit were refundable, which it was for tax years 2010 and 2011, the taxpayer would receive additional $4,650 as a refund from the IRS.

Care should be taken when claiming the credit because there are numerous procedural steps that need to be met. In addition, there are expense substantiation requirements, however the substantiation rules are relaxed to some extent with regard to taxpayers who adopt children with special needs. Moreover, taxpayers who claim the credit will increase the likelihood that they will face an Internal Revenue Service audit. As a result, I strongly suggest consulting with a tax professional to determine how to calculate the credit and properly claim it on your tax return. For more information, please see the IRS website.

 

Matthew Grosh is an attorney at Russell, Krafft & Gruber, LLP in Lancaster, Pennsylvania. He received his law degree and LL.M. in Taxation from Villanova University

IRS Announces 2013 Mileage Reimbursement Rates

The IRS issues its Standard Mileage Reimbursement Rate each year. The rate determines the amount that can be used as a deduction for business travel and serves as a guideline for employers who reimburse their employees for the same. It reflects not only fuel costs, but also factors in average wear and tear on a vehicle.

Beginning on January 1, 2013, the rate will be raised to 56.5 cents per business mile driven, one cent higher than the 2012 rate. The rate for medical or moving expenses will also be raised one cent to 24 cents per mile. The rate for charitable purposes remains at 14 cents per mile.

While there are generally no Pennsylvania laws requiring employers to use the IRS rate, there are tax advantages for doing so. The IRS will deem employers who make qualifying reimbursements up to 56.5 cents per mile as meeting their accounting requirements, thus no income reporting or withholding is required for those reimbursements. However, employers need to make sure that their employees have provided adequate proof that the mileage was strictly for business use. Qualifying employees who are not reimbursed for their business mileage will be able to deduct 56.5 cents per mile on their individual tax returns.

As an interesting side note, AAA's website offers a gas price tracker ("AAA Daily Fuel Gauge Report") that can be used to monitor gas price averages and compare averages in different geographical areas. This tool can be helpful in analyzing fuel expenses against reimbursement rates and keeping track of the fluctuation of gas prices.

According to the tracker, as of the date of this post, the national average for regular gas is $3.426 per gallon. Pennsylvania's average is higher at $3.626 per gallon. At $3.550, the average in Lancaster County is also higher than the national average, but a fraction lower than the state average. 

Student Loans and Forgiveness of Debt-What Parents Need to Know

According to American Student Assistance, It is estimated that every year, of the twenty million students attending college, twelve million borrow money to pay for their tuition.  In addition, approximately thirty seven million Americans have outstanding balances on student loans.  It is clear that student loans play a significant role in funding our college educations.

It is also common for the parents of a student to cosign the student loan, making the parent liable for repayment if the child is unable to do so.  Alternatively, parents can borrow funds directly through a Federal Parent Plus Loan to pay for their child’s college tuition.  However, cosigning or taking out a Parent Plus Loan can lead to a less obvious tax liability in the form of forgiveness of debt income.

What is forgiveness of debt income?  Let’s suppose Mary loans John $50,000 to be paid back over ten years with interest.  At that point, because John has to pay back the amount he was loaned, it is not considered income to him for tax purposes.  Two years into the loan, John still owes $40,0000 but suffers some sort of personal or financial setback.  Mary, feeling sympathetic, cuts a deal with John that she will accept a $10,000 payment to satisfy the loan, thus forgiving the remaining $30,000.  According to the IRS and relevant tax law, John has realized income of that $30,000 because he received it and no longer has the obligation to pay it back.  That is John’s forgiveness of debt income.

With regard to student loans, there are some situations in which they may be forgiven.  The Baltimore Sun recently reported a tragic situation regarding a mother who took out a $55,400 Parent Plus Loan to pay her son’s tuition at Temple University.  Sadly, her child committed suicide while he was still a student.  As is typical when a student passes away, the mother’s lender forgave the Parent Plus Loan.  However, the IRS informed the mother that she had forgiveness of debt income of the entire amount of the loan and that, as a result, she owed $14,000 in additional taxes.  This result occurred because, pursuant to IRS rules, while the IRS will not seek to collect taxes on forgiveness of debt income at the death of the borrower, it will seek to collect when a borrower, in this case the parent, is still living. 

While it is possible that, through negotiations with the IRS, the mother may be able to get her tax liability reduced or even completely erased, the process will be lengthy and require the mother to produce extensive financial data (similar to an audit).  Additionally, although many tax experts have criticized the IRS’s position, deeming it an oversight of the law, there are currently no legislative or administrative attempts to change this outcome.  As a result, parents who have cosigned their children’s student loans or borrowed money to pay for their children’s education should seek the advice of a tax professional in situations involving forgiveness of debt income.

Matthew Grosh is an attorney at Russell, Krafft & Gruber, LLP in Lancaster, Pennsylvania. He received his law degree and LL.M. in Taxation from Villanova University.

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Charitable Deductions Denied by Insufficient Acknowledgment

Some charities and other tax exempt organizations rely heavily on contributions from generous donors. On the other hand, those donors benefit by being able to deduct those donations from their taxes. However, a recent decision by the US Tax Court makes it clear how a simple mistake by the tax-exempt organization can prevent a donor from making the deduction.

In Durden v. Commissioner, TC Memo 2012-140, the Court prevented a married couple from claiming $25,000 in charitable deductions. The donations had been made to a church in various amounts throughout 2007. The Internal Revenue Service initially disallowed the deductions, and the taxpayers responded by producing records of their donations, which included a January, 2008 letter from their church acknowledging the donations.

Unfortunately, the 2008 letter did not include any statement that the church had not provided goods or services to the taxpayers in return for their donations. Because applicable tax laws specifically require such a statement, the IRS rejected the 2008 letter as an adequate acknowledgment of the donations. 

In response, the taxpayers obtained a June, 2009 letter from the church that included the required statement, however the IRS rejected the 2009 letter as untimely. The IRS based their decision on a specific tax law that requires taxpayers to receive acknowledgments from charities by the date on which they file their returns for the year the deduction is claimed, or by the return due date, including any extensions, whichever occurs earlier. In this instance, the 2009 letter was received by the taxpayers well after the return was filed in 2008.

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Will Donations be Deductible if Tax-Exempt Application with IRS is Pending?

Some of the nonprofit and charitable organizations I work with are formed for an immediate purpose. For example, the purpose may be to aid victims of a hurricane, earthquake or other natural disaster. In those situations, it is important for the nonprofit corporation to be organized and formed quickly so that it can be up and running as soon as possible.  A common question I get from those clients is whether donations will be tax deductible.  The answer hinges on the nonprofit's status with the Internal Revenue Service.

When a nonprofit organization is formed, it generally cannot simply deem itself as "tax-exempt". Instead, if the organization is not a church, it must apply to the IRS for recognition as a tax-exempt organization. This is accomplished by filing an IRS Form 1023 (or Form 1024 depending on the organization's mission) and some related documents with the IRS. The organization must then wait for several months before they hear back from the IRS and, in some instances, there are delays because the IRS might require a few changes or modifications to the organization.  Eventually, once all the conditions have been met, the IRS will send the organization a letter either granting or rejecting tax-exempt status.

Now back to the question at hand: can a donor deduct a donation to an organization that has not received a determination from the IRS?  The answer depends on the outcome of the organization's application. If tax-exempt status is granted by the IRS, that status is pushed back retroactively to the date the organization was created.  That means donors who had previously donated to the organization can deduct those donations. However, if the IRS rejects the tax-exempt status, the rejection is also deemed retroactive and the donor will not be able to deduct the donation.

That answer tends to beg another question: what should a nonprofit whose tax-exempt status is still pending tell its donors? The simple answer is that donors should be told the truth: that the organization's tax-exempt status is pending and that their donations may not be deductible if tax-exempt status is rejected. In no way should the organization make any representations or guarantees that donations will be deductible because they may not be. Because so much is hinging on the tax-exempt application, I recommend that new nonprofits seek professional help in forming the corporation and applying for tax-exempt status.

Matthew Grosh is an attorney at Russell, Krafft & Gruber LLP in Lancaster, Pennsylvania. He received his law degree from Villanova University and practices in a variety of areas including Taxation and Nonprofit & Tax-Exempt Organizations.

 

 

Lancaster County Real Estate Taxes: Making Sense of Common Level Ratios and Millage Rates

Only 19 days left to challenge tax assessments. In Lancaster County, all appeals of the assessment must be filed by August 1, 2012. An appeal filed after that date will be heard in 2013. 

New common level ratio (CLR) numbers are in place for the period 7/1/12 - 6/30/13. Lancaster County's CLR dropped from last year's 1.31 to 1.27. In addition, total tax millage rates now include 2012-2013 school district tax rates. This information is relevant in deciding whether to file an assessment appeal. CLR is the factor applied to the assessment that reflects the ratio between assessment value and fair market value. For example, an assessment of $100,000 infers a fair market value of $127,000 [$100,000 times 1.27]. Residential and commercial property owners can multiply the assessment by the CLR to see if the fair market value is accurate. If not, an assessment appeal may be in order. 

The millage rates determine the total annual property tax load. The first three digits of your property account number correspond to the municipality in which it is located.  Assuming the property with the $100,000 assessment is in Manheim Township, line 390 tells you that Manheim Township residents pay a total of 24.0285 mills annually, representing annual total taxes of $2,403.

You can find your property's account number and check your property's assessment online. In addition, the account number is listed on the school district real estate tax notice.

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Veteran Tax Incentives and Lower Unemployment Rates

In December, I wrote about the extension of several tax incentives for employers who hire veterans. According to an article by CNN, those incentives appear to be working.

In the past month, the jobless rate for all generations of veterans has been around 7.5%, although the rate for young veterans returning from Iraq and Afghanistan is slightly higher at 10.2%. These numbers show an improvement from this time last year, when the jobless rate for Iraq and Afghanistan veterans was 12.5%.

The veteran tax incentives are in the form of two tax credits:

  • The Returning Heroes Tax Credit is a credit of up to $5,600 per employee for employers that hire veterans who were looking for employment for more than six months. If the veteran has been looking for employment for less than six months, the credit is generally up to $2,400 per employee. 
  • The Wounded Warriors Tax Credit can be up to $9,600 per employee for employers that hire veterans with service-connected disabilities who have been looking for employment for more than six months.  

Both of those credits took the place of the Work Opportunity Tax Credit (WOTC), which expired at the end of 2011. The WOTC was designed to spur employers to hire individuals from targeted groups that have a high unemployment rate, including qualifying veterans. Both the Returning Heroes and Wounded Warriors Tax Credits are currently scheduled to expire after December 31, 2012. Both credits are also available to tax-exempt employers. 

Because some of the calculations and qualification criteria related to the credits are complex, I suggest that you consider consulting with a tax professional if your business or nonprofit organization is planning on utilizing one of the credits. For more information, please see the IRS website.

Matthew Grosh is an attorney at Russell, Krafft & Gruber LLP in Lancaster, Pennsylvania. He received his law degree from Villanova University and practices in a variety of areas including Taxation and Nonprofit & Tax-Exempt Organizations.

Can I Claim my Child as a Dependent?

One of the most frequent questions I get during tax season is: who gets to claim the child/children on their taxes when parents are separated, divorced, or have never been married? It also happens to be an area where I see many people make mistakes that cost them on their tax return and in their bank account. The deduction for a child for the tax year 2011 was $3,700, and the IRS has a child tax credit worth up to $1,000 per child for qualifying taxpayers. These two deductions or credits, in addition to other child related expenses or deductions, can make a significant difference in your tax liability.  Therefore, when parents are separated or unmarried it is important to understand your rights when it comes to claiming a child as a dependent.

Generally speaking, the parent who is considered the custodial parent or primary custodian is entitled to claim the child as a dependent for tax purposes. The IRS considers the custodial parent to be the parent who has the greater amount of time with the child during the year. In many cases, it’s clear which parent has the majority of the time. However, many parents have a schedule that intends for parents to share time equally with the child. In these cases, there are specific IRS rules to determine how periods of time with each parent are calculated and who is the custodial parent. In the absence of an agreement to do otherwise, these rules are used to determine who is able to claim the child as a dependent on their tax return.

Often, parents will discuss this issue and reach an agreement on who will claim a child as a dependent. When there are multiple children to the same parents, they may "split" the children, and they each claim one or more. Other parents agree to alternate years so that every other year, each parent gets to take the deduction. Either of these situations are fine, provided that you follow the rules the IRS has set out for a non-custodial parent claiming a child. Those rules provide:

  1. The parents must be divorced or legally separated under a decree of divorce or separate maintenance; separated under a written separation agreement, or lived apart at all times during the last 6 months of the year, whether or not they are or were married;
  2. The child received over half of his or her support for the year from the parents;
  3. The child is in the custody of one or both parents for more than half of the year; and
  4. The custodial parent signs a written declaration that he or she will not claim the child as a dependent for the year, and the noncustodial parent attaches this written declaration to his or her return.
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IRS Wage Garnishment and Employment

Wage garnishment – if you haven't heard of it before, you may picture crisp dollar bills surrounded by lettuce and tomatoes on a platter, or perhaps a paycheck "garnished" with a few extra zeroes. Unfortunately, wage garnishment is not typically a pleasant matter. It can occur in a variety of situations, including nonpayment of taxes. When the IRS garnishes a person’s wages, it can also impact his or her employment and, in certain cases, may raise concern in an employer’s mind.

What is Wage Garnishment?

When a person has fallen into certain types of debt, the law allows those who are owed the debt, i.e. the creditors, to obtain a court order requiring the employer of the debtor to withhold payments from his/her wages. The garnished wages are then paid directly to the creditor and are applied to the debt. IRS garnishment arises when it is determined, through the proper channels, that a taxpayer owes past due taxes. As a side note, another common area for garnishment to arise is with child support payments.

Can Garnishment Lead to Job Termination?

In my practice, I have encountered situations where employees had workers whose wages were being garnished by the Internal Revenue Service (IRS). In one instance, an employer asked whether the employee could be terminated because of the garnishment. Often, employees also wonder if the garnishment could jeopardize their employment. Many are surprised to learn that as long as the IRS garnishment is the only garnishment against an employee's wages, it would be illegal to terminate the employee for this reason.

The Law: Title III

With regard to the question at hand, IRS garnishments are surprisingly governed neither by the Internal Revenue Code nor the IRS. Instead, it is covered by Title III of the Consumer Credit Protection Act (Title III) and the United States Department of Labor’s Wage and Hour Division. More specifically, Title III states that “[no] employer may discharge any employee by reason of the fact that his earnings have been subjected to garnishment for any one indebtedness." Other related laws make it clear that Title III applies to the IRS’s tax collection process. Title III imposes a fine of no more than $1,000 or no more than one year of imprisonment on employer’s who willfully violate the requirements of Title III.

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An Update on the Adoption Tax Credit for 2011

In previous blog posts, I wrote about the adoption tax credit, which provides qualifying taxpayers who have adopted children with relief from the expenses related to the adoption. While those expenses must be substantiated with documentation, if the child has received a determination from the state that he or she has special needs, then the full credit can be claimed without substantiation. Additionally, because of the substantiation requirements, taxpayers cannot use the Internal Revenue Service's per diem rate tables.

When I had previously written about the credit with regards to the adoption of children with special needs, the Internal Revenue Service had not provided any guidance with regard to substantiating a determination of special needs from the state. Since then, the IRS has issued some guidance on their website. According to the IRS, a state's determination of special needs may be substantiated with the following items:

  1. A signed adoption assistance or subsidy agreement issued by the state;
  2. Certification from the state or a county welfare agency verifying that the child is approved to receive adoption assistance; or
  3. Certification from the state or a county welfare agency verifying that the child has special needs.

Please note that this list is not exclusive.

For the 2011 tax year, taxpayers can claim up to $13,360 for each child they have adopted. The credit limit has gone up from $13,170 for the 2010 tax year and $12,150 for 2009. While the credit can be taken in multiple years, the credit limit is cumulative and includes any adoption tax credit claimed in prior years. That means for each adopted child, once the credit limit is reached, no future credit will be available unless the credit limit is raised. Further, since 2010, the credit is "refundable," meaning that qualifying taxpayers will receive the credit even if they do not owe any tax for that year.

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Healthcare Tax Credit for Small Businesses and Tax-Exempt Organizations

It is tax season, and while much of spring is spent discussing what must be paid out in taxes, it is also a great time to take advantage of savings opportunities.

For small businesses, one of the greatest expenditures, healthcare, can now offer additional savings this tax season. The Affordable Care Act (enacted March 2010) intends to help small businesses and tax-exempt organizations afford the cost of providing healthcare to their employees. In particular, the credit is focused on helping employers with low and moderate income workers, and encouraging employers to offer health insurance for the first time or maintain the coverage that they already have.           

The Small Business Healthcare Tax Credit provides a credit worth up to 35% of eligible small businesses’ premium costs through 2013. Even if a business did not owe tax in 2011, the credit can be carried back or forward for other tax years. Non-profits are also eligible to receive a tax credit of up to 25% of the cost of the organization's premium through 2013. Even if a business has no taxable income, they may be eligible to receive the credit as a refund. This is particularly beneficial to tax-exempt organizations. In 2014, the rate increases to 50% for small businesses and 35% for non-profits. 

To be eligible, a business or tax-exempt organization must meet the following requirements: 

  1. The employer must cover at least 50% of the premium for healthcare coverage based on the single employee-only rate.
  2. The employer must have less than the equivalent of 25 full-time workers (for example, an employee with fewer than 50 half-time workers may be eligible).
  3. The employer must pay average annual wages below $50,000. The credit will gradually phase out for businesses with average wages between $25,000 and $50,000.
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2011 Tax Deadline Extended to April 17, 2012

For most tax professionals and many taxpayers, April 15th stands out every year as the day when tax returns and any related tax payments are typically due. However, this year we will have two extra days to file returns and make payments. 

The filing deadline for 2011 returns has been pushed back to Tuesday, April 17, 2012. Why? It turns out that April 15, 2012, is a Sunday and April 16, 2012 is observed as Emancipation Day, a legal holiday in the District of Columbia. Relevant laws state that District of Columbia holidays affect tax deadlines just as federal holidays do because the offices of the Internal Revenue Service will be closed. The April 17th deadline applies to any return or payment normally due on April 15th, as well as to the deadline for requesting a tax filing extension and to making 2011 IRA contributions. Taxpayers who request an extension will have until October 15, 2012 to file their returns.

As an interesting side note, Emancipation Day celebrates the day in 1862 when President Abraham Lincoln signed the Compensated Emancipation Act for the release of slaves in the District of Columbia. This occurred approximately nine months before President Lincoln issued the famous Emancipation Proclamation. For more information on Emancipation Day, please see the District of Columbia website

2012 IRS Mileage Reimbursement Rates

The IRS issues its Standard Mileage Reimbursement Rate each year. The rate determines the amount that can be used as a deduction for business travel and serves as a guideline for employers who reimburse their employees for the same. It reflects not only fuel costs, but also factors in average wear and tear on a vehicle.

In July 2011, the Internal Revenue Service responded to high gas prices by raising their mileage reimbursement rate from 51 cents to 55.5 cents per mile. In Notice 2012-1, the IRS indicated the new rate, which went into effect on January 1, 2012, would remain the same. The only change this year is that the rate for medical or moving expenses was raised from 19 to 23 cents per mile. The rate for charitable purposes remains at 14 cents per mile.

While there are generally no Pennsylvania laws requiring employers to use the IRS rate, there are tax advantages for doing so. The IRS will deem employers who make qualifying reimbursements up to 55.5 cents per mile as meeting their accounting requirements, thus no income reporting or withholding is required for those reimbursements. However, employers need to make sure that their employees have provided adequate proof that the mileage was strictly for business use. Qualifying employees who are not reimbursed for their business mileage will be able to deduct 55.5 cents per mile on their individual tax returns.

As an interesting side note, AAA's website offers a gas price tracker ("AAA Daily Fuel Gauge Report") that can be used to monitor gas price averages and compare averages in different geographical areas. This tool can be helpful in analyzing fuel expenses against reimbursement rates and keeping track of the fluctuation of gas prices.

According to the tracker, as of the date of this post, the national average for regular gas is $3.374 per gallon. Pennsylvania's average is slightly higher at $3.457 per gallon. At $3.439, the average in Lancaster County is also higher than the national average, but a fraction lower than the state average. A year ago, the gas average in Lancaster was $3.146, showing a rise of approximately $0.30 per gallon in the area over the past year.

Tax Incentives for Employers Who Hire Veterans Extended

In November, President Barak Obama signed into law the Three Percent Withholding Repeal and Job Creation Act. A part of this sweeping legislation provides incentives to employers for hiring veterans. 

The new legislation is an enhancement of the Work Opportunity Tax Credit ("WOTC"), which will sunset at the end of 2011. The WOTC was designed to spur employers to hire individuals from targeted groups that have a high unemployment rate, including qualifying veterans. 

For veterans, the new legislation takes the place of the WOTC by creating the Returning Heroes Tax Credit and the Wounded Warriors Tax Credit. Employers that hire veterans who have been looking for employment for more than six months may be eligible for a Returning Heroes Tax Credit of up to $5,600.00 per employee. Employers that hire veterans who have been looking for employment for less than six months may be eligible for a credit of up to $2,400.00 per employee. Under the Wounded Warriors Tax Credit, employers that hire veterans with service-connected disabilities who have been looking for employment for more than six months may be eligible for a $9,600.00 credit per employee.

Both of the credits apply to individuals who begin work for the employer after November 21, 2011, and the credits are scheduled to expire after December 31, 2012. Additionally, both credits are applicable to tax-exempt employers. Some of the calculations and qualification criteria related to the credits are sophisticated, so I suggest that you confer with a tax professional if your business is planning on utilizing one or both of them.

IRS Voluntary Worker Classification Settlement Program

I would like to thank Timothy Kershner, CPA for providing his accounting and tax expertise for this blog article.

Timothy Kershner, CPA is a partner at the accounting and consulting firm of Walz, Deihm, Geisenberger, Bucklen & Tennis, P.C. He has more than 20 years of experience in public accounting and operates as the partner in charge of the firm's accounting and consulting division.

One important decision most business owners must confront is whether to treat certain workers as employees or independent contractors. An employer who makes the mistake of incorrectly classifying an employee as an independent contractor can face tax consequences and incur heavy penalties. Fortunately, the Internal Revenue Service ("IRS") has launched the Voluntary Classification Settlement Program (“VCSP”), which will enable many employers to reclassify workers as employees with minimal penalties. For those who are unsure of whether they are correctly classifying their workers and are concerned about possible audits, the VCSP can work as a "reset" button that offers a fresh start.

Employees vs. Independent Contractors

Before addressing the VCSP itself, it is important to understand a few basic concepts regarding tax reporting and withholding requirements for employers. If a worker is treated as an employee, the tax law requires the employer to withhold certain portions of the worker’s pay and pay those amounts directly to the federal government. The amounts withheld are generally reported to the IRS on payroll tax returns and to the employee on IRS Form W-2. In addition, the employer must remit their portion of payroll taxes.   

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Taking a Disaster Loss Tax Deduction

In a recent blog article, Christina Hausner explained how Lancaster County residents affected by the recent flooding may be eligible for property tax relief. In addition to those tax advantages, taxpayers may be able to deduct uninsured losses resulting from catastrophic damage. 

The Internal Revenue Service allows deductions for "casualty losses," which are defined as the complete or partial destruction of a taxpayer’s property resulting from an identifiable event that is sudden, unexpected and unusual. Disaster losses are casualty losses that occur within an area that has been declared a disaster area by the federal government. 

There are two methods of determining the dollar amount of a disaster loss. The first method is to have a qualified appraiser determine the fair market value of the property immediately before and immediately after the disaster, the difference of which would be the loss. The second method takes into account the actual cost of repairing the property in determining the loss, which can only be done when the property is actually repaired. In addition, no part of a loss for which the taxpayer has been reimbursed or for which there is a reasonable prospect of reimbursement is deductible. Another limitation is that disaster losses are generally subject to a floor equal to 10% of the taxpayer’s adjusted gross income (AGI). This means that the loss can only be taken to the extent that it exceeds 10% of the taxpayer’s AGI.

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Lancaster County Residents affected by Flood may be Eligible for Property Tax Relief

On September 15, Aaron Zeamer blogged about how the flooding in Lancaster County resulted in an extension of income tax deadlines. Additional tax relief as a result of flooding could be a reduction or elimination of property taxes. If you have suffered a "catastrophic loss" due to mine subsidence, fire, flood or other natural disaster which exceeds 50% of the market value of your real property prior to the loss, you have the right to appeal your real estate assessment to the County Assessment Board. The Board has the duty to reassess your property to reflect the loss in value from the date of the loss to the end of the taxable year. In addition, any property improvements made after the loss in the same tax year shall not be added to the assessment roll for the remainder of the tax year but shall be added for the following year. If this is done, tax authorities need to reflect the reduced assessment in the form of a credit for the succeeding tax year, or if the property owner applies, taxing authorities shall pay a refund. 

We recognize that the broad scope of the term "catastrophic loss" probably means that you may have bigger problems to face than getting your property taxes reduced, but in the event that you have suffered such a loss, this is another means of relief. 

Lancaster County Floods Declared Federal Disaster - Tax Deadlines Extended and Relief Available

The flooding in Lancaster County has inconsistently affected residents and businesses. Some residents have come away from the flood with absolutely no water at all in their basements and others have seen major damage from the flooding. My own neighborhood effectively turned into an island and getting home seemed impossible without a row boat. On September 13, 2011, Lancaster County was declared a Federal Disaster Area. This declaration can have significant impact, not only for those trying to get the water out of their basement or who have been severely affected by the flooding, but also for those who had tax deadlines this week.

Lancaster County's Website has some very helpful links and information for those who were affected by the recent flooding. On their website you can apply for federal assistance through FEMA, and other federal and state agencies, including unemployment assistance for individuals who find themselves unemployed due to the effects of Hurricane Irene or Tropical Storm Lee.

For other individuals and businesses in Lancaster County and surrounding counties including Adams, Bradford, Columbia, Cumberland, Dauphin, Lebanon, Luzerne, Lycoming, Montour, Northumberland, Perry, Schuylkill, Snyder, Sullivan, Susquehanna, Union, Wyoming, and York counties, the declaration making these areas a Federal Disaster Area has extended some important tax deadlines until October 31, 2011, even if you were not directly affected by the flooding. This extension includes corporations and other businesses that previously obtained an extension until September 15 to file their 2010 returns, and individuals and businesses that received a similar extension until October 17. It also includes the estimated tax payment for the third quarter, normally due September 15. You can go to the IRS website for more comprehensive information about the tax extension.

The Federal Disaster Area determination will also allow taxpayers in the affected areas to claim disaster-related casualty losses on their federal tax returns for either this tax year or last year. 

Please also remember that if you take advantage of the deadline extension, you may still receive a penalty notice from the IRS; you will need to contact the IRS using the number provided on the notice. You may need to confirm with the IRS that you are in an affected area and are entitled to the extension without penalty.

The PA Department of Revenue is providing a similar extension for the affected counties. Their website lists additional details regarding the special extension for affected PA taxpayers.

Countless Lancaster County residents were affected by these two storms. Regardless of the degree with which the storms may have impacted your home or business, be aware that you may be eligible for some benefits or assistance due to the Federal Disaster declaration.

2011 Common Level Ratio for Lancaster County

The Pennsylvania State Tax Equalization Board recently changed the common level ratio for Lancaster County from 1.33 to 1.31. The common level ratio is the ratio of assessed value of properties to fair market value for each county.  If the fair market value equals the assessed value, the ratio would be 1.00, which is the case following an assessment.  If an assessment occurs next year, the ratio will fall to 1.00.

The common level ratio is used annually for the distribution of state subsidies for each school district and also as a measure of the fair market value of real estate for calculating realty transfer taxes.  The changes in the common level ratio reflect the changes in property value.  It is also a good measure of cost of living.  The common level ratio last year in Philadelphia, for example, was 3.13.

IRS Increases Mileage Reimbursement Rate Effective July 1

Even though gas prices are slowly falling, they are still relatively high. In fact, they are so high that the Internal Revenue Service has agreed to raise the standard mileage rate for operating a vehicle for business purposes from 51 cents to 55.5 cents per mile. The new rate applies to qualifying expenses that are both incurred and reimbursed on or after July 1, 2011. I think most would agree that despite the increase, the IRS will still not be winning any popularity contests.

While there are generally no Pennsylvania laws requiring employers to use the IRS' rate, there are tax advantages for doing so. The IRS will deem employers who make qualifying reimbursements up to 55.5 cents per mile as meeting their accounting requirements, thus no income reporting or withholding is required for those reimbursements. However, employers need to make sure that their employees have provided adequate proof that the mileage was strictly for business use.

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Recent Repeals: PA Residential Sprinkler Systems & 1099 Reporting Requirements

It doesn’t happen often, but sometimes the government realizes that it may have bitten off more than it can chew and reconsiders its actions. Such reassessment occurred twice this past April when both the Pennsylvania and federal legislatures repealed unpopular portions of legislation they had previously enacted. 

On the state level, the legislature repealed a 2009 addition to the state’s Uniform Construction Code which required residential builders to include sprinkler systems in new construction. Some have estimated that sprinklers add $2,000 to $4,000 to the price of an average new residence. Many builders and real estate professionals asserted that the additional cost would depress an already struggling home builders’ market. Thus, last month, the state legislature reconsidered and authorized a repeal of the provision and Governor Tom Corbett signed the repeal into law on April 25.

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PA State and Local Tax Also Due on April 18 in 2011

A few weeks ago I shared the good news that the IRS extended the tax deadline to April 18 this year.  If you’re like me, you probably thought, “That’s nice, but two days doesn’t make that much difference so I’ll just have my taxes done by April 15.”  Now that the deadline is fast approaching I’ve been asked by a number of friends and clients if the new deadline also applies to state and local taxes.  The PA Department of Revenue announced some time ago it had also extended the deadline for PA personal income tax returns.  However,  if you check out the homepage on the Lancaster County Tax Collection Bureau’s website you will see they have extended hours on Friday, April 15, but return to normal working hours on Monday, April 18.  They did, however, confirm that taxpayers have until Monday to file individual returns. In addition, taxpayers can now file their Lancaster County returns online.

Despite some information online to the contrary, the instructions for IRS Form 1040-ES lists April 18 as the due date for federal estimated payments as well. Filers who have applied for an extension will also receive a reprieve from the normal October 15 deadline which falls on a Saturday in 2011. Final returns are due on Monday, October 17.

Here are some parting thoughts as you take on the dreaded task of preparing your 2010 tax return.  It was Benjamin Franklin who said, “The only things certain in life are death and taxes.”  I recently read an anonymous quote in response to Franklin’s famous words, “Death and taxes may be certain, but we don't have to die every year."

**When this article was initially posted I did not include information regarding PA State Estimated Tax payments.  According to the PA Department of Revenue website Pennsylvania 2011 Personal Income Tax Estimated Payments are due on April 15.  Please note this deadline has not been extended until April 18.

IRS Tax Return Deadline Extended for 2011

For most tax professionals and many taxpayers, April 15th stands out every year as the day when tax returns and any related tax payments are typically due. However, this year we will have three extra days to file returns and make payments. 

The filing deadline for 2010 returns has been pushed back to Monday, April 18, 2011. Why? It turns out that Friday, April 15, 2011, is observed as Emancipation Day, a legal holiday in the District of Columbia. Relevant laws state that District of Columbia holidays affect tax deadlines just as federal holidays do because the offices of the Internal Revenue Service will be closed. The April 18th deadline applies to any return or payment normally due on April 15th, as well as to the deadline for requesting a tax filing extension and to making 2010 IRA contributions. Moreover, taxpayers who request an extension will have two extra days to file their returns because October 15, 2011, falls on a Saturday.

As an interesting side note, Emancipation Day celebrates the day in 1862 when President Abraham Lincoln signed the Compensated Emancipation Act for the release of slaves in the District of Columbia. This occurred approximately nine months before President Lincoln issued the famous Emancipation Proclamation. For more information on Emancipation Day, please see the District of Columbia website

Clarifying the Adoption Tax Credit and Special Needs Children

Since publishing my recent post regarding The Adoption Tax Credit and Special Needs Children we have received numerous comments and emails asking for clarification. More specifically, most inquiries are related to what evidence is required to prove that a determination of special needs has been made by the state when taxpayers are claiming the adoption tax credit on their 2010 tax return. This issue has arisen because, in many cases where a child would otherwise fit the definition of a special needs child, the adoptive parent has nothing from the state indicating that a determination has been made. 

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Third Circuit Sends Innocent Spouse Relief Case Back to Tax Court: Mannella v. IRS

A few months ago I wrote about a case I argued in the United States Court of Appeals for the Third Circuit. The case concerned whether an IRS regulation requiring taxpayers requesting equitable innocent spouse relief to request the relief within two years was valid. The effect of the regulation is that any request made after two years would be rejected, regardless of how inequitable it would be to deny the request, which I argued was contrary to Congress' intent when the law was passed in 1998.

On January 17, 2011, the Third Circuit released its Opinion which leaves the issue ultimately still undecided. In the appeal, I argued that the IRS's regulation was invalid because Congress intended the section to not have a statute of limitations, but if the regulation was valid, it was subject to "equitable tolling," which means that the statute of limitations would not bar a taxpayer from requesting relief if the taxpayer was prevented from discovering the liability or requesting relief within two years. The court held that the regulation was valid, with Judge Ambro dissenting, and the court sent the case back to the Tax Court to determine if equitable tolling applied to the regulation, and if so, whether the taxpayer was entitled to tolling in the case. I believe the court saw equitable tolling as the preferable result for two reasons. First, it has a similar effect to finding the regulation invalid. It allows taxpayers that file for relief beyond two years to still receive innocent spouse relief if they can show a good reason for doing so. Second, it allowed the Third Circuit to reach this result without disagreeing with the Seventh Circuit, which found the regulation to be valid about six months before our appeal.

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IRS Standard Mileage 2011

The Internal Revenue Service has announced a new standard mileage rate for 2011, which is generally used to estimate the costs of operating an automobile for tax purposes. The new rate, effective January 1, 2011, is 51 cents per mile, up one cent from last year. In addition, the standard mileage rate for medical or moving and medical expenses has been raised from 16.5 to 19 cents per mile, and the rate for charitable purposes remains at 14 cents per mile.

While there are generally no Pennsylvania laws requiring employers to use the IRS' rate, there may be some tax advantage for doing so. The IRS will deem employers who make qualifying reimbursements up to 51 cents per mile as meeting their accounting requirements, thus no income reporting or withholding is required for those reimbursements. However, employers need to make sure that their employees have provided adequate proof that the mileage was strictly for business use. Qualifying employees who are not reimbursed for their business mileage will be able to deduct 51 cents per mile on their individual tax returns.