The Indiana Department of Revenue has updated the information bulletin relating to the fiduciary income tax return with filing requirement changes. Effective January 1, 2013, estates or trusts having gross income of less than $600 in a taxable year are not required to file Form IT-41 (Indiana Fiduciary Income Tax Return).

We don’t know if this will pass or not, but we thought all should be aware of “The Stop the Student Loan Interest Rate Hike Bill of 2012″ (Sen 2343). It would have all S corporations with three or fewer employees who earn more than $250,000, liable for payroll taxes. Here’s a summary of the proposed bill:

• Interest rates on subsidized Stafford loans are set to double from 3.4 percent to 6.8 percent on July 1, 2012.
• This legislation will maintain the Federal student loan interest rate at 3.4 percent for an additional school year.
• The cost of a one-year extension is $5.9 billion and is covered by closing a tax loophole that certain professional service businesses use to avoid employment taxes.
• This proposal closes the loophole by requiring those with incomes over $250,000 to include, for purposes of employment taxes, income received from a Subchapter S Corporation or limited partnership interest in a professional services business.
• An S Corporation does not pay corporate taxes but passes income through to the individual shareholders, who can report it as profits rather than wages in order to lower their employment tax burden.
• The proposal is targeted only to those S Corporations that derive 75 percent or more of their gross revenues from the services of three or fewer shareholders or where the Subchapter S Corporation is a partner in a professional service business.

On March 19, 2012, Indiana Governor Mitch Daniels signed an omnibus bill containing numerous amendments to Indiana tax law. Below are the items that I think could most impact our clients.

Income Tax Provisions

• Effective July 1, 2012, a partnership must furnish to its nonresident partners annually, but not later than 30 days after the end of its taxable year (currently, the 15th day of the third month after the end of its taxable year), a record of the amount of tax deducted and retained from such partners.
• Effective July 1, 2012, the Department may permit a partnership or corporation to file one return and payment each year if the partnership or corporation pays or credits amounts to its nonresident shareholders only one time each year; the return and payment are due on or before the 15th day of the fourth month (currently, third month) after the end of the year.
• Any person filing more than 25 copies of the following forms after December 31, 2012, must file the forms electronically: Form W-2G certain gambling winnings; Form 1099-R distributions from pensions, annuities, retirement or profit sharing plans, IRAs, insurance contracts or like distributions; and Form WH-18 miscellaneous withholding tax statements for nonresidents.
• For taxable years beginning after December 31, 2012, estates and trusts with gross income of $600 or more from sources in Indiana must file income tax returns (currently, any estate or trust with gross income from sources in Indiana must file).
• Effective January 1, 2013, the income tax withholding threshold for an employer to pay withholding to the Department will be on an annual basis instead of a monthly basis. The threshold will be a monthly average during the prior year of $1,000 (currently, a monthly average of $10). The 3-month and 6-month reporting periods for employers with small withholding are eliminated.

Income Tax Credits

• The sunset date on the following credits is extended to December 31, 2016: the venture capital investment credit, the Hoosier business investment credit, the alternative fuel vehicle manufacturing investment credit and the new employer credit.

Sales and Use Taxes

• Also effective July 1, 2012, sales of wrapping material and empty containers that are acquired for shipping or delivering tangible personal property that is owned by another person, is processed or serviced for the owner and will be sold by that owner either in the same form or as a part of other tangible personal property produced by that owner in the owner’s business of manufacturing, assembling, constructing, refining or processing are exempt from the gross retail tax.
• Effective retroactive to January 1, 2012, sales of tangible personal property are exempt from the state gross retail tax if the person acquiring the property is engaged in the business of recycling. Transactions involving machinery, tools and equipment are exempt if the person acquiring that property acquires it for direct use in the direct processing of recycling materials and the person acquiring that property is occupationally engaged in recycling. Transactions involving recycling materials and other tangible personal property to be consumed in the processing of recycling materials or to become a part of the product produced by the processing of recycling materials are also exempt if the person acquiring that property acquires it for direct use in the direct processing of recycling materials and the person acquiring that property is occupationally engaged in recycling.
• Effective January 1, 2013, retail merchants must report and remit gross retail and use taxes through the Department’s online tax filing program (currently, only persons registered as a retail merchant after December 31, 2009 must remit through the online program). Additionally, provisions relating to combined sales and withholding reports are repealed.

Property Taxes

• Effective retroactive to March 1, 2011, for 2011 through 2014 assessment dates, a valuation schedule is established to be used in assessing outdoor signs.

Governor Mitch Daniels signed legislation to provide relief from Indiana Inheritance Tax. Effective July 1, 2012, Indiana will phase out the inheritance tax over nine years beginning in 2013 by providing an increasing credit against a beneficiary’s inheritance tax liability.

The credit is 10% for transfers made from persons dying in 2013, 20% for transfers made from persons dying in 2014, 30% for transfers made from persons dying in 2015, 40% for transfers made from persons dying in 2016, 50% for transfers made from persons dying in 2017, 60% for transfers made from persons dying in 2018, 70% for transfers made from persons dying in 2019, 80% for transfers made from persons dying in 2020, 90% for transfers made from persons dying in 2021; the inheritance tax does not apply to a property interest transferred after December 31, 2021.

The inheritance tax replacement amounts payable to counties is phased out over 10 years beginning with amounts payable for the state fiscal year beginning July 1, 2012. The bill also increases the inheritance tax exemption amount for Class A transferees from $100,000 to $250,000 with respect to taxable transfers resulting from the deaths of individuals dying after December 31, 2011.

Effective retroactive to January 1, 2012, a spouse, widow or widower of a child of the transferor is reclassified as a Class A transferee instead of a Class B transferee, and a spouse, widow or widower of a stepchild of the transferor is reclassified as a Class A transferee instead of a Class C transferee.

For taxpayers who either homeschool their children or send them to private elementary or high school, there’s a new Indiana deduction that allows for a $1,000 deduction per dependent child.

Now, before you get too excited, I must remind you that this is a deduction, not a tax credit.  A deduction reduces your taxable income, before calculating state and local tax. A tax credit is a dollar-for-dollar reduction in your tax liability, or 100% money back in your pocket.

Therefore, a $1,000 reduction in taxable income, saving state tax at a 3.4% rate and county tax at an average of 1.0% to 1.62% rate will only save you $44 to $50 per child. But, it’s a benefit you never received in the past. Enjoy it–take the $44 to $50, and treat the family to dinner, courtesy of Indiana.

Here’s a link to the Indiana informational bulletin if you’d like more details.

Indiana passed new tax laws in 2011 that now require certain items to be added back in arriving at Indiana taxable income. The Student Loan Interest Addback is one the new required adjustments and the Indiana Department of Revenue has recently issued additional information for use in calculating the addback for personal income taxpayers. The department reminds taxpayers that there is no addback required for the 2010 tax year. For 2011 purposes, a taxpayer must “refigure” the deduction as reported on the federal tax return using three qualifiers:

• the phaseout ranges are reduced from the federal phase out amounts, to $45,000 to $60,000 ($70,000 to $85,000 for joint filers);
• the interest is not deductible beyond the first 60 months that interest payments are required; and
• there is no deduction for voluntary payments of interest.

The required addback is the difference between the recalculated Indiana deduction and the amount reported on the taxpayer’s 2011 federal income tax return. Additional information…

The alternative minimum tax (AMT) could be out to get you. This stealth tax, originally aimed at only the highest echelon of taxpayers, is expected to apply to 4 million taxpayers on 2011 returns, according to the Tax Policy Center. Even worse, the number is projected to explode to more than 31 million in 2012, absent any new legislation.

If you haven’t taken the AMT “personally” before, now is probably the time. Here’s a quick review.

General rules: The AMT is a parallel tax system to your regular tax liability. After you have figured out your regular taxable income, AMT liability is calculated through four basic steps:

1. First, you must add certain tax preference items to your taxable income and make other technical adjustments required by law.
2. Then you subtract the special exemption amount on your tax return based on your filing status.
3. Next, apply the AMT rate to the net amount. The applicable rate is 26% on the first $175,000 of AMT income and 28% for amounts above $175,000.
4. Finally, compare your AMT liability with your regular tax liability. If the AMT is higher, you are required to pay the excess in addition to your regular tax liability.

The list of preferences and technical adjustments is too long for the space allotted here. In brief, you are required to add back certain itemized deductions and personal exemptions. That’s one reason why large numbers of taxpayers have become unsuspecting victims of the AMT. For instance, taxpayers who report high state income tax deductions are particularly vulnerable.

Ever since the monumental Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was passed in 2001, Congress has gradually increased the exemption amounts to account for inflation. But these AMT “patches” have been relatively small. The latest increase is effective only for the 2011 tax year. Unless subsequent legislation is enacted, the exemption amounts are scheduled to return to the levels they were before EGTRRA.

For 2011 returns, the exemption amount for joint filers is $74,450 (up from $72,450 for 2010). If you are a single filer, the exemption amount is $48,450 (up from $47,450). Finally, for married couples filing separately, it is $37,225 (up from $36,225).

However, the benefit of these exemption amounts is reduced for certain high-income taxpayers. Each exemption is reduced by 25 cents for each dollar of AMT income over $150,000 for joint filers; $112,500 for single filers and heads of household; and $75,000 for married couples filing separately. Despite the regular increases in exemption amounts, these figures have not been adjusted in recent years.

Reminder: This is an extremely complex area of the tax law. It is recommended that you seek assistance from a professional tax adviser. Please contact us at 317-472-2200 or info@somersetcpas.com.

President Obama on February 22 signed the Middle Class Tax Relief and Job Creation Act of 2012 (HR 3630). The new law extends through December 2012 a reduction in employment tax rates from 6.2 percent to 4.2 percent for employees and the self-employed, scaled back unemployment benefits from 93 weeks to 63 weeks in most states, and retention of the current Medicare reimbursement to physicians that otherwise would face a 27-percent reduction. The president lobbied hard for passage of the bill, stressing that the payroll tax cut extension would prevent a tax increase on 160-million working Americans and would save the average household approximately $40 per paycheck.

Congress has extended the employee-side payroll tax cut through the end of 2012. After weeks of uncertainty over whether an agreement could be reached, the House passed the Middle Class Tax Relief and Job Creation Act of 2012 (H.R. 3630) by a vote of 293 to 132 on February 17, 2012. Senate approval quickly followed, also on February 17, by a vote of 60 to 36.

Lawmakers agreed not to require the $93.2 billion estimated cost for the payroll tax cut extension to be offset by revenue-raising provisions. A potential impasse over revenue increases was avoided entirely when both parties agreed to offset costs of the full-year, two percentage point payroll tax cut through transfers from the general fund of the Treasury to the OASDI trust fund.

In a revenue neutral provision, however, the new law eliminates a timing-shift in the estimated tax payments that had been required of certain large corporations under previous laws. Non-tax provisions within the new law extend unemployment benefits and implement a “doc fix” for Medicare.

President Obama is expected to sign the bill as soon as it reaches the White House.

Please note that this has not been voted on yet, so it is not a done deal. We will post updates when available.

Negotiators struck a deal late on February 15 to extend a payroll tax cut, unemployment benefits and Medicare payments to physicians through the end of 2012. However, the timing of votes on the measure remains uncertain as tax writers continue work on the legislative text. With lawmakers preparing to leave town for a week-long Presidents’ Day recess, leaders of both parties remained unwillingly to commit to holding votes within the next two days.
Senate Majority Leader Harry Reid, D-Nev., on February 16 addressed the issue from the Senate floor, telling members that the situation was still very fluid. “We will notify all members when the conference report is scheduled in the House and we will do it over here as quickly as we can,” stated Reid. “We’re going to see if things can be expedited, but it appears that we will be in at least for tomorrow. I hope we won’t be in any longer than that, but it all depends on when the House completes the work on the conference report. That’s not scheduled yet.”

Under House rules, lawmakers are allowed three days to review a bill before a vote can be held. During his daily briefing with the press, House Speaker John Boehner, R-Ohio, deflected questions over whether he would seek to waive the rule, telling reporters instead that technical corrections to the measure were still needed. Once the conference report comes to the floor for a vote, it will face a straight up and down vote in both chambers as amendments are not allowed.

Lead negotiators House Ways and Means Committee Chairman Dave Camp, R-Mich, and Senate Finance Committee Max Baucus, D-Mont., nailed down the agreement near midnight, nearly missing the deadline for getting a bill prepared in time for a Saturday vote. The final sticking point of how to pay for unemployment benefits and the Medicare “doc fix ” was resolved by deciding to allow sales of radio spectrum licenses, reducing new government employee pension contributions and cutting some spending programs in the new health reform law.

The agreement provides that the Social Security tax for employees would remain at a reduced rate of 4.2 percent through December 2012, unemployment benefits would be scaled back in three stages, and Medicare reimbursements would not face a 27-percent payment reduction for another 10 months. In return for a reduction in UI benefits, from 93 weeks to 63 weeks in most states, Republicans dropped their demand that all recipients undergo drug testing and enroll in a GED program.