IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will remain at 55.5¢ per mile for business travel after 2011-that is, unchanged from the July 1, 2011 mid-year adjustment. This rate can also be used by employers to reimburse tax-free under an accountable plan employees who supply their own autos for business use, and to value personal use of certain low-cost employer-provided vehicles. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense will decrease by .5¢ from the July 1, 2011 mid-year adjustment to 23¢ per mile.

Feel free to contact us with any questions!

As the holidays approach, you’re probably going to give a little extra to your favorite charity. If you itemize
deductions, your kindness may bring you an extra reward in the form of a tax deduction.

Here’s a short list of tax reminders for this year’s charitable deductions:

* Make sure the organization qualifies for a deduction. Remember that contributions to civic groups, unions, chambers of commerce, and political candidates usually don’t qualify. If in doubt, check IRS Publication 78 which lists all qualified organizations. It’s available online or at many libraries.

* The law has strict recordkeeping requirements for deducting charitable contributions. For cash contributions under $250, you must have a bank record such as a cancelled check, credit card record, or receipt from the charity. For donations of $250 or more, a receipt from the charity must be obtained before filing your return.

* If you donate property, make sure you claim a realistic value. Used clothing and household items donated to charity must be “in good condition or better.” A written receipt from the charity is necessary for a deduction. You’ll need an independent appraisal for any donated item valued above $5,000.

* Don’t forget to deduct your mileage and other out-of-pocket expenses for charitable work. Track your mileage and claim 14 cents a mile in 2011.

If you have any questions concerning your charitable donations, contact our office.

Although there are only three weeks left to go before the year ends, it’s not too late to implement some planning moves that can improve your tax situation for 2011 and beyond. Below are some actions that you can take before December 31, 2011 to improve your overall tax picture.

Make HSA Contributions: A calendar year taxpayer who became an eligible individual under the health savings account (HSA) rules on December 1, 2011, is treated as having been an eligible individual for the entire year. Thus, he may make a full year’s deductible-above-the-line contribution for 2011. That means a deduction of $3,050 for individual coverage, and $6,150 for family coverage (those age 55 or older get an additional $1,000 catch-up amount).

Nail Down Losses on Stock While Substantially Preserving Your Investment Position: A taxpayer may have experienced paper losses on stock in a particular company or industry in which he wants to keep an investment. He may be able to realize his losses on the shares for tax purposes and still retain the same, or approximately the same, investment position. This can be accomplished by selling the shares and buying other shares in the same company or another company in the same industry to replace them. There are several ways this can be done. For example, an individual can sell the original holding, and then buy back the same securities at least 31 days later.

Convert a Regular IRA to a Roth IRA: Individuals who believe a Roth IRA is a better strategy than a traditional IRA, and want to remain in the market for the long term, should convert traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Note, however, that such a conversion shouldn’t be done without considering the individual’s overall tax situation. Even at depressed market levels, a 2011 rollover or conversion still will increase a taxpayer’s AGI, possibly propelling him or her into a higher tax bracket, and diluting (or eliminating) those tax breaks that have AGI-based phase-out’s or “floors.”

Re-characterizing a Traditional IRA to Roth IRA Conversion: If an individual converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value. If things are left things as-is, the individual will wind up paying a higher tax than is necessary. However, there’s a way to back out of the transaction, namely by re-characterizing the rollover or conversion. This involves transferring the converted amount (plus earnings or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. The individual can later reconvert to a Roth IRA.

Accelerate Deductible Contributions: Individuals should keep in mind that charitable contributions and medical expenses are deductible when charged to their credit card accounts (e.g., in 2011) rather than when they pay the card company (e.g., in 2012).

Solve an Underpayment Problem: An individual who expects to be under withheld for 2011 should consider asking his employer-if it’s not too late to do so-to increase income tax withholding before year-end. Generally, income tax withheld by an employer from an employee’s wages or salary is treated as paid in equal amounts on each of the four installment due dates. Thus, if an employee asks his employer to withhold additional amounts for the rest of the year, the penalty can be retroactively eliminated. This is because the heavy year-end withholding will be treated as paid equally over the four installment due dates.

Outside-the-box Solution: An individual can take an eligible rollover distribution from a qualified retirement plan before the end of 2011 if he is facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution at a 20% rate and will be applied toward the taxes owed for 2011. He can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2011, but the withheld tax will be applied pro rata over the full 2011 tax year to reduce previous underpayments of estimated tax.

Accelerate Big Ticket Purchases Into 2011 to Get Sales Tax Deduction: Unless Congress acts this year or next to extend it, the option for itemizers to deduct state and local sales taxes in lieu of state and local income taxes will expire at the end of 2011. As a result, individuals who will elect on their 2011 return to claim a state and local general sales tax deduction instead of a state and local income tax deduction, and are considering the purchase of a big-ticket item (e.g., a car or boat), should consider accelerating the purchase into this year to achieve a higher itemized deduction for sales taxes.

Pre-pay Qualified Higher Education Expenses for First Quarter of 2012: Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, individuals should consider prepaying eligible expenses if doing so will increase their deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2011 in connection with enrollment at an institution of higher education during 2011 or for an academic period beginning in 2011 or in the first 3 months of 2012.

Lock in the Potential to Earn Tax-free Gains: There is no tax on gain from the sale of qualified small business stock (QSBS) that is: (1) purchased after September 27, 2010 and before January 1, 2012, and (2) held for more than five years. In addition, such sales won’t cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met.

Be Sure to Take Required Minimum Distributions (RMDs): Taxpayers who have reached age 70- 1/2 should be sure to take their 2011 RMD from their IRAs or 401(k) plans (or other employer-sponsored retired plans). Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Those who turned age 70- 1/2 in 2011, can delay the first required distribution to 2012. However, taxpayers who take the deferral route will have to take a double distribution in 2012-the amount required for 2011 plus the amount required for 2012.

Make Year-end Gifts: A person can give any other person up to $13,000 for 2011 without incurring any gift tax. The annual exclusion amount increases to $26,000 per donee if the donor’s spouse consents to gift-splitting. Annual exclusion gifts take the amount of the gift and future appreciation in the value of the gift out of the donor’s estate, and shift the income tax obligation on the property’s earnings to the donee who may be in a lower tax bracket (if not subject to the kiddie tax).

A gift by check to a non-charitable donee is considered to be a completed gift for gift and estate tax purposes on the earlier of:

(1) The date on which the donor has so parted with dominion and control under local law as to leave in the donor no power to change its disposition, or

(2) The date on which the donee deposits the check (or cashes it against available funds of the donee) or presents the check for payment, if it is established that:

•The check was paid by the drawee bank when first presented to the drawee bank for payment;
• The donor was alive when the check was paid by the drawee bank;
•The donor intended to make a gift;
•Delivery of the check by the donor was unconditional;
•The check was deposited, cashed, or presented in the calendar year for which completed gift treatment is sought and within a reasonable time of issuance.

Thus, for example, a $13,000 gift check given to and deposited by a grandson on Dec. 31, 2011, is treated as a completed gift for 2011 even though the check doesn’t clear until 2012 (assuming the donor is still alive when the check is paid by the drawee bank).

If you have any questions on the information listed above, please do not hesitate to contact us!

On November 21, 2011, President Obama signed the “Three Percent Withholding Repeal and Job Creation Act.” This new law repeals three percent withholding on certain payments to government contractors, and it provides tax credits to employers who hire unemployed veterans.

The law creates the “Returning Heroes Tax Credit” and the “Wounded Warriors Tax Credit.” Employers may qualify for a credit of up to $5,600 for hiring a veteran who has been looking for employment for more than six
months. A credit of up to $2,400 applies for veterans who have been unemployed for more than four weeks but less than six months.

Employers who hire an unemployed veteran with service-connected disabilities who has been looking for work for more than six months may be eligible for a tax credit of up to $9,600.

The credits apply to new hires after November 21, 2011, through December 31, 2012.

For more information about the new law, contact our office.

Who: Use tax applies to individuals and businesses. Individuals who purchase taxable products or services from out-of-state locations or buy within Pennsylvania but pay no sales tax to the seller are responsible for paying use tax. The same applies to businesses. Use tax has been added as a line to the 2011 tax return for the PA personal return and must be reported.

What: Use tax is the counterpart of sales tax and applies to purchases made over the Internet, through toll-free numbers (800, 888 and 877), from mail order catalogs and from out-of-state locations when sales tax was not charged and collected by the seller. If you purchase items or services that are subject to sales tax but are not charged sales tax when buying, you are responsible for remitting the use tax due directly to PA Department of Revenue. The use tax rate is the same as the sales tax rate: 6% state, with an additional 1% local tax for items purchased or used in Allegheny County. 2% local tax applies to items purchased or used in Philadelphia. Some examples of items subject to use tax are: antiques, paintings, appliances, boats, books and stationery, cigarettes, computers, exercise and sports equipment, formal clothing, furniture and furnishings, jewelry, luggage and handbags, motor vehicles, musical instruments, souvenirs, televisions, radios and stereo equipment, video and camera equipment, office equipment, administrative supplies, furniture, cleaning supplies and computers. Some examples of taxable services include lawn care, pest control, self-storage, building cleaning and maintenance services.

When/Where: The reporting of use tax is relatively simple. Non-recurring use tax liabilities can be reported on a Use Tax Return, PA-1, and full remittance is due on or before the 20th day of the month after the month in which the purchase was made (like sales tax). Any business that incurs use tax liabilities on a regular basis is encouraged to register for a use tax account number by completing the PA Enterprise Registration Form, PA-100. Businesses currently registered for the collection of sales tax are required to report and remit use tax liabilities when filing sales tax returns.

Why: Use tax is an important source of revenue for the Pennsylvania General Fund. Every dollar collected is a dollar available for government and public services. Equally as important, uniform collection and enforcement of use tax provides for fair competition between out-of-state and Pennsylvania-based businesses.

Below are some examples of purchases subject to Use Tax:

Individuals

1) A Pittsburgh resident purchases $200 worth of books from an Internet bookseller on Nov. 1. Shipping and handling charges were $12. A use tax payment of $14.84 ($212 X 7%), which includes 1% local use tax, is due on or before Dec. 20.

2) A resident of Reading orders $50 worth of flower bulbs from an out-of-state catalog company on Feb. 1. The company charges $3 shipping and handling. A use tax payment of $3.18 ($53 X 6%) is due by March 20.

3) A resident of Harrisburg drives to a neighboring state, purchases a $500 television on April 30 and takes the television back to Pennsylvania in his own vehicle. A use tax payment of $30 ($500 X 6%) is due by May 20.

Businesses

1) A Harrisburg business purchases computer equipment from an out-of-state vendor on Feb. 10, totaling $6,100, including shipping. A use tax payment of $366 ($6,100 X 6%) is due on or before March 20.

2) A Pittsburgh business orders $2,050 of office supplies (including shipping) online on Aug. 27. A use tax payment of $143.50 ($2,050 x 7%), which includes 1% local use tax, is due on or before Sept. 20.

If you have any questions on the reporting of Use tax, please do not hesitate to contact our office at 717-812-1040 and we would be happy to assist you.