IRS Announces Pension Plan Limitations for 2012

 

Issue Number:    IR-2011-103

The Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.  Highlights include:

·         The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.

·         The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.

·         The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.

·         The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011.  For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000.  For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

·         The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

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New Payment Card Reporting Requirements

 

IRS-Issue 2011-42

The IRS is providing special transitional relief to banks and other payment settlement entities required to begin reporting payment card and third-party network transactions to the IRS on new Form 1099-K.

By law, reporting is scheduled to begin in early 2012 for payment card and third-party network transactions that occurred in 2011. But under new guidance, they will not have to begin reporting until 2013. Details on the special transitional relief and reporting requirements are in these FAQs, and more information on this relief is in Notice 2011-88 and Notice 2011-89.

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IRS Offshore Voluntary Disclosure Program Increased Tax Compliance

The Internal Revenue Service’s Offshore Voluntary Disclosure Initiatives are generally effective at convincing thousands of taxpayers with foreign bank accounts to come forward and disclose them to avoid heavy penalties and criminal prosecution, but some improvements are needed, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, noted that the IRS’s 2009 Offshore Voluntary Disclosure Initiative prompted nearly 7,000 taxpayers in 2009 and over 10,000 taxpayers in 2010 with hidden offshore assets and income to disclose them to the IRS. The IRS announced a 2011 OVDI in February with stiffer penalties.

The TIGTA report found that the IRS’s voluntary disclosure practices were effective, and cases were being appropriately assigned and verified, despite the unusually high volume of disclosure requests received and accepted by the IRS. However, some improvements are needed.

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IRS ‘Soft Notices’ May Convince Taxpayers to Pay Up

 

A pilot project at the Internal Revenue Service to send out so-called “soft notices” to taxpayers whose tax returns appear to disagree with the information forms from their employers and banks could provide some benefits in terms of improved tax compliance.

However, questions about the cost and benefits of the pilot project remain, according to a new government report from the Treasury Inspector General for Tax Administration. The pilot project aims to improve taxpayer compliance by mailing informational materials to them when an income discrepancy is spotted in their tax returns.

The pilot project calls for the Automated Underreporter Program to send out notices designed to serve as educational tools to taxpayers whose returns show income discrepancies between the information they report to the IRS on their tax returns and related information that employers and financial institutions provide the IRS. Such “soft notices” do not require the taxpayer to pay more taxes, provide additional documentation, or even respond. The notices instead are designed to act as educational tools, as well as encourage self-correction by taxpayers, and improve voluntary tax compliance.

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Singles Less Apt to Do Retirement Planning

A majority of Americans believe that retirement planning is easier for unmarried people, according to a new survey, but those perceptions are probably wrong. The survey, by Charles Schwab & Co., found that 53 percent of married Americans and more than 69 percent of singles said they believe it is easier to make major financial decisions for retirement when there is no spouse in the picture. However, the survey found that singles are on average actually less prepared and less confident than married couples when it comes to being financially prepared for retirement.

According to the survey, 85 percent of married Americans are already saving for retirement, compared with 67 percent of singles across all age groups. Thirty-eight percent of married Americans expressed confidence in their retirement readiness compared to just 32 percent of those who are single.

Both married and single respondents to the survey saw potential drawbacks to retirement planning without a spouse. Nearly two-thirds (65 percent) of married people and 57 percent of singles said that not having a spouse’s additional income or investments as a safety net could be a challenge. Similarly,58 percent of married people and nearly half (47 percent) of singles said it might be challenging to not have a spouse to rely on for health insurance or long-term care. Fifty-eight percent of married Americans said it would be easier to decide when to retire without having a spouse to consider, while 62 percent of those that are married said that choosing where to retire would be easier if they were single.

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Taxpayers Still Owe IRS after Paying off Installment Agreements

The Internal Revenue Service’s streamlined installment agreement program has brought in large amounts of revenue from people who owed back taxes, but at least 90,000 taxpayers using a streamlined installment agreement to pay back taxes may still owe the IRS after they complete the terms of their agreement.

A new report from the Treasury Inspector General for Tax Administration on the program found that approximately 3.1 million taxpayers entered into streamlined installment agreements with the IRS last fiscal year, resulting in approximately $5.9 billion in collections for the IRS. The agreements reduce the amount of documentation needed from taxpayers and require only minimal processing on the part of the IRS.

However, the report found that IRS procedures have allowed for inconsistent processing and treatment of taxpayers, some of whom still owed taxes even after fulfilling the terms of the agreement. Due to inconsistencies, some agreements will not be paid off when expected, according to the report.

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IRS Audits Google’s Offshore Tax Strategies

The Internal Revenue Service is reportedly auditing Google in an effort to learn more about the search giant’s use of foreign subsidiaries to shift profits in the wake of three acquisitions.

One of the deals involved the company’s 2006 acquisition of YouTube, according to a Bloomberg report. The IRS is reportedly looking into how the company valuated software rights and intellectual property licensed in other countries. A company spokesman classified the IRS audits as a “routine inquiry.” As a large business taxpayer, the company’s taxes are regularly examined by the IRS.

Google has been known to use sophisticated tax strategies dubbed the “Double Irish” and the “Dutch Sandwich” to shift its foreign income to subsidiaries in countries such as Ireland and the Netherlands.

Transfer pricing and the use of foreign subsidiaries to move multinational corporate profits around the world have come under increasing scrutiny. Companies have stepped up their lobbying efforts in a push for a tax holiday on an estimated $1 trillion in repatriated foreign profits, and the idea has found favor with some lawmakers who have introduced legislation that would bring foreign profits back to the U.S. at a low tax rate.

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In 2012, Many Tax Benefits Increase Due to Inflation Adjustments

 

IR-2011-104

 

For tax year 2012, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation, the Internal Revenue Service announced today. By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation.

New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following:

    • The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.
    • The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
    • Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.
    • For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
    • The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.
    • The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.
    • For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.The annual exclusion for gifts remains at $13,000.
    • The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.

     

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Most Rich Families Unprepared for Wealth Transfer

 

Less than half of wealthy families have plans in place for transferring their assets to the next generation, according to a new survey. The survey, by the SEI Network, of more than 100 individuals representing families with an average net worth of more than $20 million, found that only 46 percent said they have a wealth transfer strategy or plan in place.

Thirty-eight percent said they have prepared a will, but done nothing else. Eight percent of the respondents said they have done nothing so far. The findings indicate a barrier to future generations’ ability to sustain their parents’ wealth, and a lack of focus or desire to create wealth transfer plans among high-net-worth families, despite clear future intentions for their wealth.

The overwhelming majority of those polled (80 percent) said they expect to pass on their wealth to direct family members. Nearly all of those polled (97 percent) said they believe the future generation has the ability to continue creating wealth and improving the lives of their families. However, families with plans to transfer that wealth remain in the minority.

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IRS Wrongly Demanded Repayments of First-Time Homebuyer Tax Credit

 

The Internal Revenue Service mistakenly sent notices to approximately 80,000 taxpayers telling them they needed to repay the First-Time Homebuyer Tax Credit. A new report by the Treasury Inspector General for Tax Administration found that 27,728 taxpayers were notified they had a repayment obligation even though they had purchased their homes in 2009, when there was no repayment obligation. In addition, the information provided by a vendor hired by the IRS to use third-party data to identify individuals who may have disposed of their principal residences was unreliable, resulting in 53,558 individuals who incorrectly received notices to repay the Homebuyer Credit.

The First-Time Homebuyer Tax Credit was a program aimed at stimulating the housing industry. While it helped prop up the industry, especially in the wake of the mortgage crisis, the quick ramp-up and shifting requirements left the IRS issuing the tax credits to thousands of taxpayers who did not fit the qualifications, including minors. The IRS was then forced to demand repayments of the tax credits that had been issued incorrectly, as well as from homeowners who fit into the various recapture provisions if they didn’t hold onto their homes long enough.

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