Tax Breaks Can File Starting in Mid- to Late February

reprinted from the IRS Website

For most taxpayers, the 2011 tax filing season starts on schedule. However, tax law changes enacted by Congress and signed by President Obama in December mean some people need to wait until mid- to late February to file their tax returns in order to give the IRS time to reprogram its processing systems.

Some taxpayers – including those who itemize deductions on Form 1040 Schedule A – will need to wait to file. This includes taxpayers impacted by any of three tax provisions that expired at the end of 2009 and were renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act Of 2010 enacted Dec. 17. Those who need to wait to file include:

• Taxpayers Claiming Itemized Deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes (add link to Schedule A). In addition, itemized deductions include the state and local general sales tax deduction that was also extended and which primarily benefits people living in areas without state and local income taxes. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
• Taxpayers Claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students – covering up to $4,000 of tuition and fees paid to a post-secondary institution – is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit extended last month and the Lifetime Learning Credit.
• Taxpayers Claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.

In addition to extending those tax deductions for 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act also extended those deductions for 2011 and a number of other tax deductions and credits for 2011 and 2012 such as the American Opportunity Tax Credit and the modified Child Tax Credit, which help families pay for college and other child-related expenses. The Act also provides various job creation and investment incentives including 100 percent expensing and a two-percent payroll tax reduction for 2011. Those changes have no effect on the 2011 filing season.

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the recent tax law changes. In the interim, taxpayers affected by thesetax law changes can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes. Additional information will be available at www.IRS.gov.

For taxpayers who must wait before filing, the delay affects both paper filers and electronic filers. The IRS urges taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax law changes and ensure accurate tax returns.

Except for those facing a delay, the IRS will begin accepting e-file and Free File returns on Jan. 14. Additional details about e-file and Free File will be announced later this month.

2010 NEW Tax Law Summary

reprinted from Business Accounting Insider, 12/29/10

The following provides a brief summary of some of the tax provisions of the Tax Relief, Unemployment Insurance Re-authorization, and Job Creation Act of 2010 (2010 Tax Relief Act) as signed into law by President Obama on December 17, 2010.

Tax Rates

Individuals’ taxable income will continue to be subject to six tax rates, 10, 15, 25, 28, 33 and 35 percent through 2012. Also, the expanded 15percent bracket for married joint filers, to provide marriage penalty relief, is extended through 2012. Estates’ taxable income will continue to be subject to five tax rates, 15, 25, 28, 33 and 35 percent through 2012.

Capital Gains and Qualified Dividends Rates

The uncertainty surrounding planning for capital gains is temporarily over as the 2010 Tax Relief Act has extended the 0 and 15 percent rates on adjusted net capital gains through 2012. Also extended is the treatment of qualified dividend income as adjusted net capital gain, taxable at the same 0 and 15 percent maximum rates through 2012. The Act also extends the 0 and 15 percent AMT rates on adjusted net capital gains through 2012.

Employee’s Payroll Tax Reduction

In place of the Making Working Pay Credit, the 2010 Tax Relief Act reduces the employee portion of Social Security taxes from 6.2 to 4.2 percent for 2011 wages (2011 only). The employer portion remains at 6.2 percent. A similar rate reduction applies to the railroad retirement tax.

Self-Employed SECA Tax Changes

The 2010 Tax Relief Act reduces self-employed individuals’ SECA tax from 12.4 percent to 10.4 percent for earned income in 2011. In addition, the above-the-line deduction for SECA taxes paid is increased from 50 percent to 59.6 percent for 2011 (2011 only).

Estate and GST Tax and Basis

The 2010 Tax relief Act reinstates the estate and Generation-Skipping Transfer (GST) taxes for decedents dying, and transfers made, after December 31, 2009. As a result, estates of decedents dying in 2010 are subject to the estate tax, unless the executor elects to have the carryover basis rules apply instead. If the executor does not make the election, the recipient of property will receive date-of-death fair market value basis under the basis rules and will be subject to estate tax. If the carryover basis is not elected, the lifetime exclusion amount for estates of decedents dying in 2010 is $5 million. The Act also provides that, for generation-skipping transfers made in 2010, the applicable tax rate is zero (congress gave this provision so as not to penalize taxpayers who relied on the repeal of the GST tax in 2010 before enactment of this law).

Estate and GST Extension of Time to File, Pay, and Make Disclaimers

The 2010 Tax Relief Act provides that, for estates of decedents dying after December 31, 2009 and before December 17, 2010, the due date for (1) filing an estate tax return, (2) paying the estate tax, and (3) making a disclaimer of an interest in property passing by reason of the decedent’s death, is nine months after December 17, 2010. Likewise, for any generation-skipping transfers made after December 31, 2009 and before December 17, 2010, the due date for filing any GST tax return, including any election required to be made on the return, is nine months after December 17, 2010.

Estate and GST Tax Exemption

The 2010 Tax Relief Act provides that, for estate of decedents dying after 2010, the applicable exclusion amount is the sum of (1) the “basic exclusion amount” ($5 million for estates of decedents dying in 2011) and (2) in the case of a surviving spouse, the “deceased spousal unused exclusion amount.” For estates of decedents dying after 2011, the $5 million basic exclusion amount will be increased by cost of living adjustments. The Act equates the GST tax exemption to the “basic exclusion amount” of $5 million, indexed for inflation, without regard to the “deceased spousal unused exclusion amount.”

Maximum Estate and Gift Tax Rate

The maximum estate and gift tax rate for transfers over the lifetime exclusion is 35 percent for 2010 through 2012. Under the 2010 Tax Relief Act, for gifts made in 2010, the lifetime exclusion is $1 million. However, for gifts made after December 31, 2010, the gift tax lifetime exclusion reunifies with the estate tax lifetime exclusion of $5 million.

Estate Tax Exclusion Portability

Under the 2010 Tax Relief Act, any applicable exclusion amount that remains unused as of the death of a spouse who dies after December 31, 2010 generally is available for use by the surviving spouse, as an addition to the surviving spouse’s applicable exclusion amount. A deceased spousal unused exclusion amount may not be taken into account by a surviving spouse unless the executor of the estate of the deceased spouse files an estate tax return on which the amount is computed, and makes an election on the return that the amount may be taken into account by the surviving spouse. The election, once made, is irrevocable and must be timely filed. The GST exemption is not portable.

AMT Patch

Congress has come through with another AMT “Patch” that increased the individual AMT exemption amounts for 2010 and 2011. These amounts will increase for inflation in 2011. The AMT exemption amounts for 2010 are:

• $72,450 (up from $70,950 in 2009) for married couples filing a joint return and surviving spouses
• $47,450 (up from $46,700 in 2009) for an individual who isn’t married or a surviving spouse
• $36,225 (up from $35,475 in 2009) for married individuals filing separate returns

Nonrefundable Personal Credits Can Off-Set AMT

The 2010 Tax Relief Act allows an individual to offset entire regular tax liability and AMT liability by the nonrefundable personal credits for 2010 and 2011, i.e. the child tax credit, dependent care credit, lifetime learning credit, American opportunity tax credit, etc.

Child Tax Credit

The 2010 Tax Relief Act extends provision that the $1,000 per child amount of the Child Tax Credit and the earned income formula for determining the refundable portion of the credit are extended through 2012.

Non-Business Energy Property Credit

The 2010 Tax Relief Act extends the credit for one year and restores the amount to 10% of the amounts paid for qualified energy efficiency improvements and the amounts paid for residential energy property expenditures. The Act allows the credit for windows, skylights, and doors that meet Energy Star standards and efficiency standards for furnaces, boilers, and stoves.

Personal Exemption Phase-Out and Overall Limitation on Itemized Deductions

Set to expire after 2010, the Act reinstates the personal exemption phase-out rules through 2012 and the limitation of itemized deductions through 2012.

Standard Deduction Marriage Penalty Relief

The 2010 Tax Relief Act increases the standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual through 2012.

Election to Claim Itemized Deduction for State/Local Sales Tax

The 2010 Tax Relief Act retroactively extends the provision to allow taxpayers to deduct state and local sales taxes in lieu of state and local income taxes through 2011.

Educational Credit and Deductions

The Act extends the American Opportunity Tax Credit (AOTC) for higher education expenses through 2012. The maximum AOTC is $2,500 per eligible student per year. The credit is allowed for each of the first four years of a student’s post-secondary education and 40% of the credit is refundable. One item to note is that the Act removed computer expenses from the list of qualified eligible expenses for the credit. The 2010 Act also extends the Qualified Tuition Deduction through 2011 and the Student Loan Interest Deduction through 2012.

Bonus Depreciation and AMT Depreciation Relief

The bonus depreciation rate is 100 percent for qualifying property that is (1) placed in service and acquired after September 8, 2010 and before January 1, 2012, or (2) acquired after September 8, 2010 and before January 1, 2012, but placed in service before January 1, 2013 if the property is qualified aircraft or long-production-period property. In addition to extending the eligibility period for bonus depreciation, the extension of the placed-in-service deadline also extends the eligibility period for obtaining exemption from the AMT depreciation adjustment. For 2012, bonus depreciation reverts back to 50 percent and it is the last year bonus depreciation is available.

15-Year MACRS Depreciation for Qualified Improvement Property

The 15-year recovery period for qualified leasehold improvements, qualified retail improvements, and qualified restaurant improvement property has been extended retroactively for 2010 through 2011.

Research Credit

The 2010 Tax Relief Act extends the research credit retroactively for 2010 through 2011. The credit is generally equal to 20 percent of the amount by which the taxpayers’ qualified research expenses exceed a specific base amount unless the taxpayer elects the alternative simplified credit.

New Markets Tax Credit

For qualified equity investments in a qualified community development entity, the New Markets Tax Credit has been extended through 2011, subject to a $3.5 million maximum annual amount.

Tax-Free IRA Distributions Donated to Charity

The 2010 Tax Relief Act extends the exclusion that allows taxpayers to exclude from income up to $100,000 of qualified charitable distributions from an IRA or Roth IRA through 2011. A qualified charitable distribution is any otherwise taxable distribution from an IRA or Roth IRA that is made directly by the IRA trustee to a qualified charitable organization (certain organizations don't qualify) and is made on or after the date on which the individual whose benefit the IRA is maintained has attained age 70^1/2. Under a special rule, an IRA owner may elect to treat qualified charitable distributions made during January 2011 as though they were made during 2010.

The information contained in this article does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. This information is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer.

Help For Small Employers To Claim New Health Care Tax Credit

On December 2, 2010, the Internal Revenue Service released final guidance for small employers and small tax-exempt organizations eligible to claim the new small business health care tax credit for the 2010 tax year. The release includes a one-page form and instructions small employers will use to claim the credit for the 2010 tax year.

New Form 8941, Credit for Small Employer Health Insurance Premiums, and newly revised Form 990-T now are available on the official IRS website at www.IRS.gov. The IRS also posted on its website the instructions to Form 8941 and Notice 2010-82, both of which are designed to help small employers correctly figure and claim the credit.

Included in the Affordable Care Act enacted in March 2010, the small business health care tax credit is designed to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

The new guidance addresses small business questions about which firms qualify for the credit by clarifying that a broad range of employers meet the eligibility requirements, including religious institutions that provide coverage through denominational organizations, small employers that cover their workers through insured multi-employer health and welfare plans, and employers that subsidize their employees’ health care costs through a broad range of contribution arrangements.

Small businesses can claim the credit for 2010 through 2013 and for any two years after that. For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations.

reprinted from Shadian Law

The maximum credit goes to smaller employers—those with 10 or fewer full-time equivalent (FTE) employees—paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year. Since the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.

Eligible small businesses will first use Form 8941 to figure the credit and then include the amount of the credit as part of the general business credit on its income tax return. Tax-exempt organizations will first use Form 8941 to figure their refundable credit, and then claim the credit on Line 44f of Form 990-T. (Though primarily filed by those organizations liable for the tax on unrelated business income, Form 990-T also will be used by any eligible tax-exempt organization to claim the credit, regardless of whether they are subject to this tax.)

reprinted from Shadian Law

P

Important Dates January 15th - 4th Quarter Est. Tax Payment for 2010 taxes April 15th - Personal Returns Due Preparing for 2010 Taxes As the leaves fall during the months of November and December we encourage you to make an appointment with us to go over your final numbers for the year and create a tax plan that suits your personal or business needs. This is a great opportunity to get a clear idea of where you stand financially as of 2010, and if there are any adjustments to your financial situation that can be made before the end of the year to maximize your profits and minimize tax liability. Tax breaks such as the Energy efficient home improvement credit and the Making Work Pay tax credit (along with many others) will be expiring at the end of 2010, and there is no indication of these being renewed in 2011. This is a vital time to look ahead and take advantage of the tax breaks in place today. Please see our website at www.mbtaxpro.com for help in your tax organization. We have a page full of useful forms to help keep your finances in order. You are also welcome to call or email the office and Fern will send you over forms that are best suited for your particular tax needs. Bookkeeping By MB Tax MB Tax Professionals offers bookkeeping to facilitate your business financial organization and to make your tax time with us even easier. Our mission is to alleviate you of the day to day accounting tasks so that you can focus on growing your business. We want to help you achieve a clear picture of your company's financial position so that you can make more informed financial decisions. We work closely with business owners to implement accounting solutions that are tailored to meet the needs of your business. Whether you need help closing out your books at the end of the month, weekly tracking of your expenses, or you crave systems that will help increase productivity and efficiency, MB Tax can help! We offer weekly, monthly, or quarterly services, depending on the needs of your business. We also offer a year end overview of your books. Our general bookkeeping fee is $45/hour, with weekly/monthly/quarterly rates as well. Give us a call and we will work out the best bookkeeping plan for you. Lower Paychecks No Matter What in 2011? (reprinted from telegram.com) Employers in the U.S. are starting to warn their workers to prepare for slimmer paychecks if Congress fails to vote on an extension of Bush-era tax cuts. "I've been doing payroll for probably close to 30 years now, and never have we seen something like this, where it gets that down to the wire," said Dennis Danilewicz, who manages payroll services for about 14,000 employees at New York University's Langone Medical Center. "That's what's got a lot of people nervous. All we can do is start preparing communications with a couple of different scenarios." Lawmakers won't start debating whether to extend the cuts, which expire Dec. 31, until after the Nov. 2 elections. Because it takes weeks to prepare withholding schedules, the Internal Revenue Service will probably have to assume the cuts will expire and direct employers to increase deductions starting Jan. 1, experts say. If Congress fails to act, income tax rates will revert to higher levels dating from June 2001. For a married couple with an income of $80,000, that would drain an extra $221.48 in withholding from a semi-monthly paycheck, according to calculations by the Tax Institute at H&R Block. Married individuals earning $240,000 a year would lose an additional $557.78 to withholding in a single semi-monthly paycheck. The Tax Institute at H&R Block calculated federal tax rates for single-income earners and married taxpayers without children. Paychecks could shrink in January and into February, depending on how long it takes Congress to act. January could well be a time of "sticker shock" for salaried employees and their employers, said Kathy Pickering, executive director of the Tax Institute, an independent research division at Kansas City, Missouri-based H&R Block Inc. "If the laws get passed late in December, it's just necessarily going to take one to three weeks to get those payroll tables updated and implemented into the system," Pickering said. Allowing the tax cuts to expire, even temporarily, would deal a blow to disposable income and could curtail the consumer spending that accounts for about 70 percent of the economy, said Alec Phillips, a Washington-based economist at Goldman Sachs Group Inc. "The longer the expiration lasts, the more significant the impact will be," he said. Please see the tables below for a more comprehensive view on what this means for you, courtesy of www.taxfoundation.org. For the full article, see our MB Tax Pro Blog! Table 1 Summary of Taxes Owed (+ or -) on Typical Tax Returns 2011 Full Expiration Republican Plan Democratic Plan Single Parent, One child, $25,000 -$901 -$1,856 -$1,856 Married couple, three children, $45,000 $1,028 -$1,510 -$1,713 Married couple, two children, $50,000 $2,833 $690 $690 Married couple, two children, $85,000 $7,235 $5,385 $5,385 Single, no children, $60,000 $8,255 $7,500 $7,500 Single, no children, $150,000 w/ investment income $28,340 $25,071 $25,071 Married couple, two children, $150,000 w/ investment income $21,602 $17,800 $17,800 Married couple, two children, $300,000 $76,616 $64,971 $68,392 Married couple, no children, $420,000 w/ investment income $106,815 $95,554 $98,591 Married couple, no children, $1,000,000 w/ investment income $293,106 $231,900 $260,871 Retired couple, $60,000 w/ investment income $3,444 $768 $768 Table 2 Summary of Effective Tax Rates (Taxes as a Percentage of Income) Paid on Typical Tax Returns 2011 Full Expiration Republican Plan Democratic Plan Single Parent, One child, $25,000 -3.6% -7.4% -7.4% Married couple, three children, $45,000 2.3% -3.4% -3.8% Married couple, two children, $50,000 5.7% 1.4% 1.4% Married couple, two children, $85,000 8.5% 6.3% 6.3% Single, no children, $60,000 13.8% 12.5% 12.5% Single, no children, $150,000 w/ investment income 18.9% 16.7% 16.7% Married couple, two children, $150,000 w/ investment income 14.4% 11.9% 11.9% Married couple, two children, $300,000 25.5% 21.7% 22.8% Married couple, no children, $420,000 w/ investment income 25.4% 22.8% 23.5% Married couple, no children, $1,000,000 w/ investment income 29.3% 23.2% 26.1% Retired couple, $60,000 w/ investment income 5.7% 1.3% 1.3% Changes in filing Payroll Tax The IRS has announced that proposed regulations will expand the use of electronic payment systems for payroll and other tax payments, and discontinue the use of paper coupons next year. For the full article, please see our MB Tax Pro Blog!	Helpful Links More About Us Our Blog Our Network Helpful Links Forms Our Services Tax Planning Representation Business Constulting Tax Preparation See what our clients have to say! Our Fans
"At MB Tax Pro we are tax professionals and business consultants. We are in partnership with you, year round, to lower your tax liability to the fullest extent of the law, to maximize profits, inspire growth and provide peace of mind. " - MB Tax Pro

Changes In Filing Payroll Tax

The IRS has announced that proposed regulations will expand the use of electronic payment systems for payroll and other tax payments, and discontinue the use of paper coupons next year.

What are Paper Coupons?

In the past, businesses could submit payroll tax payments using a paper coupon by taking the coupon to a bank along with a check for the payroll tax amount. The IRS says the paper coupon system will no longer be maintained by the Treasury Department after Dec. 31, 2010.

What is the New Electronic Payment System?

There is not a new system; the proposed regulations will require use of the existing federal tax deposit process, through the Electronic Federal Tax Payment System (EFTPS).

What is EFTPS?

The Electronic Federal Tax Payment System (EFTPS) was set up to provide taxpayers a way to make payments electronically, instead of mailing them. The IRS says that using EFTPS benefits users because they can make payments at any time, day or night, from anywhere, by computer or phone. EFTPS also reduces payment errors. And you can schedule payments up to 120 days in advance of the payment date.

How Do I Sign Up for EFTPS?

Since you will most likely have to stop using payment deposit coupons come January 1, 2011, it may benefit you to sign up now so you can become comfortable with the service. You can sign up by going to the the EFTPS website at www.eftps.gov or by calling EFTPS Customer Service at 1-800-555-4477. For more information on how to enroll and pay using EFTPS, see IRS Publication 4132 (PDF).

Failure To File Penalties can make this Halloween verrry spoooky!

If you owe taxes, the Internal Revenue Service will calculate penalties and interest on the amount owed. If you have a refund, the IRS may pay you interest on the delayed refund. (Note the difference between "will" and "may" - the IRS generally pays interest on refunds that have been delayed because of slow processing by the IRS. Since most late tax returns take longer to process, the IRS "may" pay you interest on based on the extra amount of time it takes them to process your return.) If you have a refund, there is no penalty for filing late. Penalties are calculated on the amount due. Since there is no amount due, there is no penalty.

If you have a balance due on a late tax return, the IRS will calculate additional penalties and interest. There are three separate penalties:

• Failure to File Penalty
• Failure to Pay Penalty
• Interest

Each is calculated differently. Let's take a look at each one.

Failure to File Penalty

The failure-to-file penalty is calculated based on the time from the deadline of your tax return (including extensions) to the date you actually filed your tax return. The penalty is 5% for each month the tax return is late, up to a total maximum penalty of 25%. The percentage is of the tax due as shown on the tax return. If your tax return is more than five months late, simply multiply your balance due by 25% to calculate your failure to file penalty.

Failure to Pay Penalty

The failure-to-pay penalty is calculated based on the amount of tax you owe. The penalty is 0.5% for each month the tax is not paid in full. There is no maximum limit to the failure-to-pay penalty. The penalty is calculated from the original payment deadline (the original April 15th filing deadline) until the balance due is paid in full.

Interest

Interest is calculated based on how much tax you owe. Interest rates change every three months. Currently, the IRS interest rate for underpayment of tax is 4% per year. The interest is calculated for each day your balance due is not paid in full.

IRS interest rates are variable and are set quarterly. For historical IRS interest rates, see this chart at TaxAlmanac.org.

If you haven't filed your 2009 taxes yet, it is not to late to set things right. Call or email the office for a tax preparation appointment, and we can give you an idea if you have been incurring penalties and interest thus far. If you don't make an appointment soon, BEWARE!!

Vote on Tax Cuts Down to the Wire - Employers Warn of Smaller Checks

Vote on tax cuts down to the wire -

Employers warn of smaller checks

Employers in the U.S. are starting to warn their workers to prepare for slimmer paychecks if Congress fails to vote on an extension of Bush-era tax cuts.

“I’ve been doing payroll for probably close to 30 years now, and never have we seen something like this, where it gets that down to the wire,” said Dennis Danilewicz, who manages payroll services for about 14,000 employees at New York University’s Langone Medical Center. “That’s what’s got a lot of people nervous. All we can do is start preparing communications with a couple of different scenarios.”

Lawmakers won’t start debating whether to extend the cuts, which expire Dec. 31, until after the Nov. 2 elections. Because it takes weeks to prepare withholding schedules, the Internal Revenue Service will probably have to assume the cuts will expire and direct employers to increase deductions starting Jan. 1, experts say.

“We’re kind of stuck between a rock and a hard place,” said Ron Moser, head of human resources for the school district of Kenmore-Town of Tonawanda, N.Y., which pays about 1,900 teachers, custodians and aides each month. In upstate New York, where winter heating costs are among the highest in the country, many school employees earn between $20,000 and $40,000 a year, he said, and losing $50 in a paycheck is “a significant dollar amount.”

“We’re starting to get the calls” from employees asking what they need to do for the next tax year, Moser said.

President Barack Obama and most Democrats want tax cuts extended for middle-income earners, but to end for the wealthiest Americans, the top 2 or 3 percent of earners. Republicans want tax cuts extended for everyone, arguing that an increase makes little sense as the economy recovers from the worst recession since the 1930s. Tax cuts went into effect in 2001 and 2003.

For Moser, the challenge of the moment is keeping people in the Buffalo suburb, home to about 78,000 residents, calm about what will happen in January. The area has several manufacturing employers — including 3M Co., General Motors Co. and Praxair Inc. — and unemployment is 7.6 percent, lower than the national rate of 9.6 percent. Still, many people are worried, he said.

“The bulk of our employees don’t understand” the coming tax debate in Congress, Moser said. “When they see this type of thing happening, they go into panic mode. They don’t follow what’s going on.”

If Congress fails to act, income tax rates will revert to higher levels dating from June 2001.

For a married couple with an income of $80,000, that would drain an extra $221.48 in withholding from a semi-monthly paycheck, according to calculations by the Tax Institute at H&R Block. Married individuals earning $240,000 a year would lose an additional $557.78 to withholding in a single semi-monthly paycheck. The Tax Institute at H&R Block calculated federal tax rates for single-income earners and married taxpayers without children.

Paychecks could shrink in January and into February, depending on how long it takes Congress to act.

January could well be a time of “sticker shock” for salaried employees and their employers, said Kathy Pickering, executive director of the Tax Institute, an independent research division at Kansas City, Missouri-based H&R Block Inc.

“If the laws get passed late in December, it’s just necessarily going to take one to three weeks to get those payroll tables updated and implemented into the system,” Pickering said.

Allowing the tax cuts to expire, even temporarily, would deal a blow to disposable income and could curtail the consumer spending that accounts for about 70 percent of the economy, said Alec Phillips, a Washington-based economist at Goldman Sachs Group Inc.

“The longer the expiration lasts, the more significant the impact will be,” he said.

Economists raised estimates for consumer spending in the third quarter to 2 percent from 1.9 percent, according to the median forecast on a Bloomberg News survey this month. Spending rose at a 2.2 percent pace in the second quarter. The Commerce Department will release third-quarter data tomorrow.

Making a withholding-rate change could take longer for small businesses that don’t outsource payroll services, experts said. If a business can’t react fast enough, employees could recoup any over-withholding by filing a new W-4 tax form to temporarily lower their federal withholding rate.

Another option is to wait until 2012, when workers file their tax returns for the previous year.

Taxpayers could use the same strategies if Congress reinstates the tax cuts next year and they need to recoup the extra withholding.

Jodi Parsons, manager of payroll and accounts payable at IFMC, a health care management company based in West Des Moines, Iowa, said if the IRS issues two sets of withholding tables, her two-person office could be overwhelmed with processing changes to W-4 forms.

“We’d have to basically go back and hand-calculate checks for all 800-900 employees to determine whether or not we need to deduct additional taxes from them or refund taxes,” Parsons said.

For the full article, see the link below:
http://www.telegram.com/article/20101028/NEWS/10280738/1237