“The Saver’s Credit is particularly great because it offers many workers an added incentive to save for their future retirement, while potentially lowering their tax bill today,” said Catherine Collinson, president of the Transamerica Center for Retirement Studies®.

Here’s how it works:

Check Your Eligibility
For singles, anyone earning up to $28,250 in 2011 or $28,750 in 2012 is eligible. For the head of a household, the income limit is $42,375 in 2011 or $43,125 in 2012. For those who are married and file a joint return, the income limit is $56,500 in 2011 or $57,500 in 2012. (All income requirements are based on Adjusted Gross Income.)

You must be 18 years or older by January 1 and cannot be a full-time student or be claimed as a dependent on another person’s tax return. If you fit within these parameters, the Saver’s Credit may be for you.

Depending on your filing status and income level, you may qualify for a nonrefundable credit of up to $1,000 (or $2,000 if filing jointly) on your federal income taxes for that year when you contribute to a 401(k), 403(b), 457, 501(c)(18)(D), SEP or SIMPLE plan, or an IRA.

Save for Retirement
If your employer offers a retirement plan, make sure you enroll. Or open a traditional or Roth IRA with the financial institution of your choice. If you are enrolled in your employer’s retirement plan, you may already qualify for the credit.

In general, for every dollar you contribute to a qualified retirement plan or IRA, up to the lesser of the limits permitted by an employer-sponsored plan or the IRS, you defer that amount from your current overall taxable income on your federal tax returns.

File Your Tax Return and Claim the Credit
When you prepare your federal tax returns, you then claim your Saver’s Credit by subtracting this tax credit from your federal income taxes owed.

If you use a professional tax preparer, ask about the Saver’s Credit, called the “Retirement Savings Contributions Credit” on Forms 1040, 1040A and 1040NR. Or if you use tax preparation software, be sure to use Form 1040, Form 1040A or Form 1040NR to file your return.

The Saver’s Credit is not available with Form 1040EZ, although the IRS has included instructions with the EZ directing you to a different form if you choose to claim the credit.

Lastly, if you prepare your tax returns by hand, start with Form 8880, “Credit for Qualified Retirement Savings Contributions,” to determine your credit rate and corresponding credit amount. Then use Form 1040 or Form 1040A to file your return.

Transfer the amount of the Saver’s Credit from Form 8880 to line 50 of Form 1040, line 32 of Form 1040A or line 47 of Form 1040NR. Have questions? See IRS publication 590, ask a tax professional or log on to the IRS website at www.irs.gov.

The 12th Annual Transamerica Retirement Survey found that just 21 percent of American workers with an annual household income of less than $50,000 are aware that the credit exists. Don’t overlook Uncle Sam’s Saver’s Credit; it may help you pay less in your current federal income taxes while saving for retirement.

For more details on the Saver’s Credit and online retirement planning calculators, visit the Transamerica Center for Retirement Studies® at http://www.transamericacenter.org. The Transamerica Center for Retirement Studies® is a non-profit corporation.

Although your bottom line may change little, there are changes you should be aware of for this year’s tax return. “Unless lawmakers extend them, this will be the last year to claim several well-known tax breaks,” according to TaxACT spokesperson Jessi Dolmage. “Take advantage of them while you still can. With 2012 being an election year, it’s anyone’s guess as to what changes could be in store for next year’s return.”

Before you do your taxes, read this summary of the more notable changes that may affect your federal return this year.

The filing deadline is Tuesday, April 17, 2012, because April 15 is a Sunday and Washington, D.C., is recognizing Emancipation Day on April 16. Don’t use the later deadline as an excuse to procrastinate, though. When you rush, you’re more likely to make mistakes that could cost you money and time. Furthermore, filing, paying or providing information late will result in IRS penalties that have increased this year.

Your 2011 tax return could be your last chance to claim one of the credits for energy-efficient home improvements as well as deductions for tuition and fees, educator expenses, mortgage insurance premiums, and the option to include your state and local sales taxes paid as an itemized deduction (in lieu of state and local income taxes paid).

The Making Work Pay Tax Credit and Alternative Motor Vehicle Credit (unless it was a new fuel-cell vehicle) that you could claim last year have expired. The Making Work Pay Tax Credit was essentially replaced by the payroll tax holiday for 2011, which employees and the self-employed already received in 2011 paychecks through a reduction in FICA-OASDI Social Security taxes. Unlike the Making Work Pay Tax Credit, employees who benefited from the payroll tax holiday don’t need to claim it on this year’s tax return.

The amount of the Health Coverage Tax Credit decreased to 72.5 percent for qualified health insurance coverage received between March and December 2011.

If you converted a traditional IRA to a designated Roth IRA in 2010 or rolled over a qualified retirement plan to a Roth IRA, but did not report the taxable amount on your 2010 tax return (due April 2011), you must report half the amount on this year’s return and the other half on your 2012 return. Details are available in IRS Publication 575 at http://wwww.irs.gov.

Amounts for standard mileage, standard deductions, personal exemptions and the Alternative Minimum Tax have increased. Note that there are different standard mileage rates for miles driven before July 1 and after June 30. Details about all increases and other tax law changes can be found in IRS Publication 17.

Online and downloadable tax preparation programs make navigating tax law changes easy. When choosing your software, Dolmage reminds you to carefully weigh your options, especially if you’re using a free solution. “Make sure it covers your tax situation. Many free federal products only cover simple returns, like Form 1040EZ returns. Most taxpayers need forms and schedules that are only included in overpriced solutions.”

Dolmage says TaxACT Free Federal Edition is for simple and complex returns, including those with itemized deductions and income from self-employment, investments, rental properties and farms. TaxACT also includes free federal e-filing, guarantees for maximum refund and accuracy, and unlimited free tax help via e-mail.

For more information about tax law changes, visit http://www.irs.gov and http://www.taxact.com/taxinfo. Learn more about TaxACT Free Federal Edition at http://www.taxact.com.

First, gather your tax documents and information. You’ll need W-2s from your employer, receipts, a copy of last year’s return and any 1098s and 1099s. Avoid forgetting something important by using a tax return checklist at http://www.taxact.com/checklist.

Next, take a few minutes to get informed. Tax law changes every year, especially in recent years. Taxes have a major impact on your personal finances-why not have a basic understanding of them to make sure you’re getting all your money? You also don’t want to miss out on the several tax breaks that expire after 2011. Getting informed is as easy as reading a brief section called “What’s New for 2011” in IRS Publication 17 at http://www.irs.gov.

Third, prepare your return online or download software and use a free solution. Why pay if you don’t have to? Do a little research about free solutions to make sure your situation is covered. You can try online products risk-free, so take a couple for a test-drive. Many experts consider TaxACT to be the most complete free tax product.

Tax preparation solutions walk you through every step, from start to finish, at your pace. They’re designed for users who know a lot about taxes and those who know nothing about them. Top solutions provide free tax help and back your results with several guarantees. If you’re thinking about changing solutions or filing for the first time, TaxACT in particular makes the transition easy with data import and fast start options.

Electronically file your return. E-filing is easy, convenient and safe. It’s also the only filing method that allows you to receive confirmation from the IRS when your return is received and processed.

Getting a refund? Select direct deposit. Combined with e-file, you’ll receive your refund in eight to 10 days, rather than six to eight weeks for a check.

Fourth, don’t procrastinate. The IRS filing deadline for 2011 tax returns is April 17, 2012. You could lose money from errors due to rushing, including typos and missed tax benefits. If you’ve experienced major life changes during the year, allot some extra time to make sure you get all your tax benefits.

Need more time to file? Request an automatic six-month filing extension by filing IRS Form 4868. Keep in mind, a filing extension does not extend your time to pay, so pay as much as possible by April 17, 2012. Failing to pay on time results in penalties and interest that could increase your tax bill by more than 25 percent.

If you can’t afford to pay what you owe, the IRS offers help. Call the agency to discuss installment plans, payment options, extended time to pay and other assistance.

More tax time tips can be found at http://www.irs.gov. Learn about TaxACT and start your free federal return at http://www.taxact.com. You can also visit http://www.taxact.com/taxinfo for a list of key tax law changes.

To start, estimate your federal and state taxes using a tax preparation solution. Companies make their tax preparation software available at different times, but TaxACT is the first to release its software each year in early October and TaxACT Free Edition estimates your federal taxes for free.

Using a tax preparation solution will help identify areas for potential savings, especially those that require action by December 31. You’ll also see the impact of the latest tax law changes on your bottom line. Tax breaks you claimed last year may have expired, changed amounts or have different qualifications. Conversely, new tax breaks may be available.

Knowing early the approximate amount you’ll be refunded or owe may influence your year-end spending. If you expect a large refund, you can begin planning how to invest that money. If you have a balance due, make a payment now or adjust your withholding through the end of the year so you’ll owe less at tax time.

Even if you don’t estimate your taxes, consider making these year-end, money-saving moves:

Give charitably to IRS-approved organizations if you itemize deductions. Whether you donate cash, clothing or household items, save your gift receipts. Use the fair market value to determine the deductible amount of your non-cash donations.

Some energy-efficient home improvements made before December 31, 2011 will result in tax credits. Visit http://energy.gov for information.

If you (not your mortgage company) pay your own real estate taxes, consider prepaying taxes due early 2012 by December 31 so you can deduct them on your federal return.

Make your January mortgage payment by December 31 to increase your mortgage interest deduction. If your mortgage interest statement does not reflect your pre-January 1 payment, deduct the correct amount on your tax return and submit a statement with your return explaining the difference between your deduction amount and the lender’s statement.

Contribute the maximum allowed amounts to your 401(k) or 403(b) retirement plans.

Convert your traditional IRA to a Roth IRA. The gross income cap for who can convert has been removed.

Defer income such as year-end bonuses and stock options until January 1, 2012 to decrease your taxable income for 2011.

If you own stocks with big losses, consider selling them in order to offset taxes on gains.

Contribute to a 529 College Savings Plan if your state offers one. Contributions are typically deductible.

Pay your spring 2012 college tuition now if you haven’t yet reached the Tuition & Fees Deduction $4,000 maximum.

Finally, gather and organize your tax documents. Print a tax return checklist at http://www.taxact.com/checklist. Preparing early will allow you to file as soon as you receive all your W-2s and 1099s in January or early February. If you owe taxes, you can still file early and schedule payment anytime before the April 17, 2012 filing deadline.

Information about tax breaks for 2011 federal returns is available at www.irs.gov and you can learn more about TaxACT at http://www.taxact.com.

What is the Right to Apportion?
A taxpayer generally pays tax in each jurisdiction based on their activity within that jurisdiction. When business is conducted solely within a taxpayer’s home state, and there is otherwise no connection with any other jurisdiction, the home state usually has the right to tax 100-percent of the taxpayer’s income. However, a taxpayer whose activities span several states must divide up its income among the states so that its income is taxed in an equitable manner from both the taxpayer’s and state tax authorities’ point of view.

Historically income was divided among states based upon the percentage of property owned, the compensation paid, and the revenue earned in each jurisdiction. Many states are moving toward a sales-factor only approach in order to increase the taxes paid by companies based outside the state. Nonetheless, the basic concept of apportionment remains, regardless of which factors are used. Apportioning income often presents taxpayers with the ability to lower their state income tax burden.

How is the Right to Apportion Established?
A company must meet certain requirements in order to apportion. The rule is that a company must have some kind of connection with more than one state, typically a physical connection. While this principle may seem straightforward, there is much more to it, as states differ on how this concept is applied. In some states, such as Florida, a taxpayer with enough connection outside of the state may apportion its income, even if the taxpayer is not actually subject to tax outside of Florida. Under this standard, a taxpayer may simply register to do business in a state that does not administer an income tax, (e.g., Nevada or Wyoming). Physical business activities outside the state are not necessary.

Some states are in the middle, like California. Under its laws, a taxpayer must actually conduct business outside of the state in order to apportion. Being incorporated or registering to do business outside of California is not enough. However, the taxpayer does not necessarily have to be subject to a tax in another state, nor does it necessarily have to have an office or other permanent place outside of California. The taxpayer may simply have employees entering the state for business reasons, for example. Other states are more draconian: New Jersey requires taxpayers to have a regular place of business outside New Jersey, plus the taxpayer must actually pay income tax to the state in which it has a regular place of business. This is perhaps the harshest standard, as a company may be subject to tax outside of New Jersey, but it still may not apportion its income on its New Jersey return. The taxpayer pays income tax to another state, but does not have an office or other place from which business is conducted it may result in double taxation. In this example, a portion of the income would be taxable outside of New Jersey, and 100-percent of the income would be subject to New Jersey income tax.

A growing number of states are adopting new standards in order to subject more out-of-state entities to their taxes. To increase revenue, many states are adopting what is called Economic Nexus. Under the economic nexus standard, a company may be subject to income tax as a result of having a customer or client in the state. In-state physical activities are not required. While this may pose a problem for out-of-state companies, it also presents an opportunity for taxpayers seeking to reduce their tax burden in their home states. Here, the right to apportion may be established by having out-of-state customers. No office or other business activity should be required outside the taxpayer’s home state if that home state adopts the Economic Nexus standard.

There are times when the cost of establishing the right to apportion may make it impractical. Establishing a place of business outside of a state often requires an investment in capital. Cost-effective ways of establishing the right may include sending personnel into a state, or having an employee work from home in a state where the taxpayer does not otherwise have business operations. In states that utilize the Economic Nexus, the cost of establishing the right may be minimal. For example, companies that sell via the internet may already meet the right to apportionment requirement in Economic Nexus states.

Finally, it is important to note that a company may already have the right to apportion. It is not uncommon for opportunities to be missed during the tax preparation process.

What is the Benefit to Establishing the Right to Apportion?
By establishing the right to apportion, companies may reduce their overall state tax burden. One way to do this is to establish the right to apportion to a jurisdiction that does not administer an income tax. For example, say that a company is based in Georgia, but 25-percent of its customers are located in Nevada (a state without an income tax). By establishing the right to apportion under Georgia law and by apportioning income to Nevada, about a quarter of its income may escape state taxation.

Another way to reduce tax is to apportion to a jurisdiction with a lower tax rate. Continuing with our example above, if a more than insubstantial number of this company’s customers are in Florida, a portion of its income should be taxed at a lower 5.5-percent rate, a savings of 1.6-percent on that income (disregarding the effect on a corporation’s state income tax deduction on its federal return).

One issue with establishing the right to apportion is the effect of states’ different requirements. A taxpayer may establish the right to apportion in one state, but still may not meet the standard in another state. For example, a company based in New Jersey with clients in Connecticut, but no place of business there, may be permitted to use apportionment on its Connecticut return, but not its New Jersey return. As stated above, a taxpayer must have a place of business outside of New Jersey in order to apportion income on its New Jersey tax return. However, Connecticut has roughly the same standard as Florida – that is, if another state has the right to impose a tax upon the taxpayer, regardless of whether it actually does impose a tax, the taxpayer should have the right to apportion. In this case, the taxpayer should be permitted to apportion its income on its Connecticut income tax return, but not its New Jersey return.

Your company has undoubtedly looked everywhere possible to reduce expenses and increase revenue. If you’re already operating on tight budget, seek additional opportunities to save money via your taxes. Consult your accountant to see if you’re eligible to apportion your income, potentially an area of significant savings.

About the Author:
Carl Richie, CPA is a Tax Manager at Kaufman, Rossin & Co., one of the top CPA firms in Florida. He can be reached at crichie@kaufmanrossin.com.

The Problem
Technology seems to have gotten ahead of the country’s sales tax laws. Internet retailers say they’re exempt from collecting sales tax in states where they do not have a physical presence; states argue that sales taxes are already due on all sales and should be collected at the point of purchase.

This tax loophole puts traditional, brick—and-mortar businesses—the backbone of their communities-at a distinct competitive disadvantage to remote sellers who don’t collect sales tax. This can lead to stores shutting their doors for good and jobs being lost.

In the U.S., there are more than 12 million shopping center-related jobs. One out of every 11 U.S. jobs is shopping center-related and for every 100 individuals directly employed at regional shopping centers, an additional 20 to 30 are supported in the community. This means that a decrease in retail sales will have a ripple effect on other businesses that provide jobs, such as restaurants, movie theaters and gas stations.

Moreover, states are losing critical funding, at a time when it is needed more than ever, for schools, law enforcement, first responders, government services and the jobs they provide.

“While the Internet marketplace has rapidly expanded, tax collection for e-commerce sales lags woefully behind,” said William F. Fox, director of the Center for Business and Economic Research at the University of Tennessee. “We urgently need a new commonsense solution for both consumers and businesses.”

A Solution
That’s where the Main Street Fairness Act comes in. It is expected to create a viable and equitable solution for both online and brick-and-mortar retailers.

Through the Act, Congress gives states the ability to require out-of-state vendors to collect and remit sales taxes. It grants that authority particularly to states that have simplified their tax codes through the Streamlined Sales and Use Tax Agreement.

Explained Michael Kercheval, president and CEO of the International Council of Shopping Centers, “The Main Street Fairness Act will give retailers a level playing field, allowing them to continue creating jobs and protecting local economies.”

Learn More
For more information, visit http://www.icsc.org/mainstreetfairness or call (202)626-1400.

First, take a few minutes to learn what tax credits and deductions exist. The Internal Revenue Service has surprisingly easy-to-understand information on its website at www.irs.gov. Tax preparation solutions also offer information and tips on their websites, even if you don’t use their product.

Second, save receipts and documents for whatever you think you might be able to claim. “You may not qualify a particular credit or deduction right now, but you may by the end of 2011,” said Jessi Dolmage, spokesperson for TaxACT. “Organize documents by category and save in one place to make tax time easier.”

To help you get started on your everyday tax savings, TaxACT summarizes several savings opportunities.

Parents who work, attend school or are disabled may be able to write off child care expenses for children under 13. The Child and Dependent Care Credit includes before- and after-school care and day camp (overnight camp does not qualify). The credit amount depends on income, but is generally 20 to 35 percent of up to $3,000 in qualifying expenses per dependent, or $6,000 for two or more dependents.

If you use a personal vehicle for business, charitable, medical or moving purposes, you may be able to deduct the mileage. The IRS’ standard mileage rates for the first half of 2011 are 51 cents per business mile, and 19 cents per medical and moving mile. Business, medical and moving miles driven between July 1 and December 31, 2011 are worth 55.5 and 23.5 cents per mile. Mileage for charitable organizations is 14 cents per mile for all of 2011.

Direct and indirect expenses for use of your home for business purposes may be deductible. The space must be regularly and exclusively used as your principal place of business or for business meetings with patients, clients or customers. The amount is determined by the percentage of your home used and whether gross business income is less than your total business expenses.

Depending on your adjusted gross income and whether you’re covered by an employer-sponsored plan, you may deduct up to $5,000 of contributions to a traditional IRA. If you’re 50 or older, you can deduct as much as $6,000. Contributions to both traditional and Roth IRAs for 2011 must be made by April 17, 2012.

If medical and dental expenses for you, your spouse and dependents exceed 7.5 percent of your AGI, 2011 costs may be an itemized deduction. Expenses may include insurance premiums, fees paid to medical professionals, prescription drugs, transportation costs and hospital services.

Generating income from a hobby? You may be able to claim hobby expenses up to the amount of income generated as an itemized deduction. The IRS considers a hobby an activity you’d do even if it didn’t generate income. Keep in mind you may get bigger tax benefits from making it a business if you’re generating regular income from the hobby.

If you itemize, you can generally deduct interest paid on your home mortgage(s). The amount depends on the mortgage date, amount and how you use the mortgage proceeds.

Learn more about all of these tax breaks at http://www.irs.gov.

Tax preparation solutions help you easily navigate these credits and deductions. They even complete the forms for you. TaxACT solutions for 2011 returns will be available in early October, allowing you to estimate your federal and state taxes, and get year-end tax tips. Learn more at http://www.taxact.com.

Tips for Keeping Excellent Tax Records

After you file your taxes, you will have many records that may help document items on your tax return. You will need these documents should the IRS select your return for examination. Here are five tips from the IRS about keeping good records.

• Normally, tax records should be kept for three years. Some documents – such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property – should be kept longer.

• In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return.

• Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.

For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at http://www.irs.gov.

Nine Facts for Filing an Amended Return

An amended tax return generally allows you to file again to correct your filing status, your income or to add deductions or credits you may have missed.

Here are nine points the IRS wants you to know about amending your federal income tax return.

• Use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended income tax return.

• Use Form 1040X to correct previously filed Forms 1040, 1040A or 1040EZ. An amended return cannot be filed electronically, thus you must file it by paper.

• Generally, you do not need to file an amended return due to math errors. The IRS will automatically make that correction. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS normally will send a request asking for those.

• Be sure to enter the year of the return you are amending at the top of Form 1040X. Generally, you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.

• If you are amending more than one tax return, prepare a 1040X for each return and mail them in separate envelopes to the appropriate IRS campus. The 1040X instructions list the addresses for the campuses.

• If the changes involve another schedule or form, you must attach that schedule or form to the amended return.

• If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.

• If you owe additional 2010 tax, file Form 1040X and pay the tax before the due date to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.

• Form 1040X was recently redesigned. Previously the form consisted of three columns; Column A-Original amount, Column B-Net change, and Column C-Correct amount. The redesigned form now has just one column where the Correct Amount is the only figure entered, making it easier to make changes to previously filed returns.

The 2010 Tax Relief Act, in part, continued the lower tax rates created during the presidency of George W. Bush, and removed some near-term planning uncertainty. Consider these immediate action steps that may help you to better position yourself from a financial and retirement planning perspective:

Use Social Security tax rate reduction to increase retirement savings.
For 2011 the individual Social Security tax rate has been lowered from 6.2 percent to 4.2 percent. For an individual making $75,000, this 2 percent reduction could mean $1,500 more in his paycheck over the course of the year. In terms of planning, consider using this found money by contributing more to your 401(k) plan or funding a Roth or traditional IRA.

Use IRA distributions to make charitable contributions.
Prior tax law permitted individuals age 70 1/2 or older to use up to $100,000 per year of IRA distributions to make charitable contributions and avoid paying income tax on that amount. The 2010 Tax Relief Act reinstated it for 2010 and extended the provision through 2011.

Consider selling certain capital assets over the next two years.
The 2010 Tax Relief Act maintains the top capital gains tax rate of 15 percent as well as the special qualified dividends tax rate of 15 percent. As you consider your investment options over the next two years and whether you want to sell any assets, you should consider how these lower tax rates could benefit you.

Consider deferring tax liability on 2010 Roth IRA conversions to 2011/2012.
Earlier changes in tax law eliminated income limits on conversions from a traditional IRA to a Roth IRA and provided for a special one-time opportunity for 2010 conversions. You can opt to pay the taxes on the conversion entirely on your 2010 return, or defer them and pay half in 2011 and the other half in 2012. Prior to the 2010 Tax Relief Act it seemed like paying the tax in 2011 and 2012 at higher rates would be a bad choice. With the continuation of lower tax rates for 2011 and 2012 most taxpayers should now choose to defer this tax liability.

A trap for the unwary here is not planning to pay the conversion tax liability in 2011 and 2012. To avoid this trap you should estimate how much your tax liability will be for both years and then make sure you either adjust your withholding from your employer or make estimated payments so that you have the liability covered when you file your 2011 and 2012 tax returns.

Revisit estate planning.
Thanks to the 2010 Tax Relief Act the federal estate tax exemption is now $5 million. This means most people won’t have to worry about estate planning to minimize or avoid federal estate taxes, though there are many other reasons besides taxes to do estate planning. Also, this provision is only effective for two years and could change after 2012. Estate and inheritance tax rules for a state may be different and generate tax issues at a lower amount than the $5 million federal exemption.

Plan for possible higher rates.
Traditional tax planning would have you defer a tax liability in order to keep more money in your pocket, earning interest, longer. However, since the 2010 Tax Relief Act only provides for continued lower rates for two years and rates could go up after that, it could make sense to trigger the income tax on an asset sooner and pay tax now. One way to do this is to convert non-Roth assets, which could be in your 401(k) or traditional IRA, into Roth assets. The creation of Roth assets allows you to hedge against increasing future tax rates and have after-tax assets to manage your tax position once in retirement.

• A Two Percent Employee Payroll Tax Cut — The legislation includes an employee-side payroll tax cut for over 155 million workers, providing tax relief of about $112 billion in 2011 paychecks. 

• Extension of Unemployment Benefits — The legislation extends emergency unemployment benefits at their current level for 13 months, preventing an estimated 7 million workers from losing their benefits over the next year as they search for jobs. 

• The Child Tax Credit — The $3,000 refundability threshold established in the Recovery Act for the Child Tax Credit will be extended, ensuring an ongoing tax cut to 10.5 million lower-income families with 18 million children. 

• The Earned Income Tax Credit — The legislation continues a Recovery Act expansion of the Earned Income Tax Credit worth, on average, $600 for families with 3 or more children, and reduces the “marriage penalty” faced by working married families. Together, these enhancements to the EITC will help 6.5 million working families with 15 million children. 

• The American Opportunity Tax Credit — The new American Opportunity Tax Credit — a partially refundable tax credit worth up to $2,500 per student per year that helps more than 8 million students and their families afford the cost of college — is  continued. 

• 100 Percent Expensing — The legislation  temporarily allow businesses to expense 100 percent of certain investments in 2011, potentially generating more than $50 billion in additional investment in 2011, which will fuel job creation. 

• 1603 Renewable Energy Grants — The agreement extends the 1603 program, which provides payments in lieu of renewable energy tax credits and is helping to support tens of thousands of jobs in the wind and solar industries.

Of course, you and your tax and financial advisers are in the best position to determine which of these strategies make sense for your personal circumstances. Be sure to consult with your tax and legal advisers regarding your personal circumstances.

Keep in mind that that 2010 Tax Relief Act continues the recent history of an unsettled and uncertain tax environment, and the best way to defend against such uncertainty is to keep your focus on your financial and retirement plan goals and stay in action.

Contractor Conundrums
Finding ways to cut costs without sacrificing quality is the entrepreneur’s credo. But what you consider a cost-savings, the IRS may deem noncompliance and issue penalties accordingly.

Misclassifying employees as contractors can cost you. At first glance, contractors are appealing. They are responsible for paying all 15.3 percent in FICA (Federal Insurance Contributions Act) taxes, which are simply Social Security and Medicare taxes combined. Employees only pay 5.65 percent in FICA taxes (7.65 percent in 2012 once the Social Security tax break expires) and the business owner is responsible for matching 7.65 percent. One less employee on payroll can also mean smaller state unemployment insurance (SUI) and Federal Unemployment Tax Act (FUTA) payments.

Yet many small business owners are misclassifying workers, and they may pay the price, according to Michael Alter, president of SurePayroll.

“The IRS has a laundry list of what constitutes a contractor,” he says. “If you think you’re employing contractors yet dictate when and where they do their work, provide their training and tools and pay them according to a regular pay schedule, then you should most likely pay them as employees.”

Alter’s advice can save you from hefty fines. The 2010 federal budget planned to generate $7 billion in additional revenue over the next 10 years from stricter enforcement of proper worker classification. Half the states are ramping up their own classification crackdowns, hoping to cover their budget donut holes from the nation’s estimated 3.4 million misclassified workers, according to a recent New York Times article.

The solution? “Bite the bullet,” Alter says. “Classify them correctly and put them on payroll. The money you pay in FICA and unemployment taxes is usually less than what you’ll pay in IRS penalties.”

Adding another person to payroll may sound like a bigger burden than simply cutting a check to a contractor, but payroll services alleviate the pain of calculating and deducting withholdings. Some services, such as SurePayroll, also handle paying and filing all federal, state and local payroll taxes and allow you to process payroll online 24 hours a day, 7 days a week. The average customer’s payroll takes two minutes to process.

LLC Lessons and S-corp Snafus
Your business’ IRS status dictates how you must pay certain payroll taxes. As a limited liability company (LLC), you’re obligated to pay payroll taxes on your employees’ incomes and manage their payroll, or you can use a payroll service. However, you cannot put yourself on the payroll if you own more than 2 percent of the company.

Many small business owners learn this the hard way when they don’t pay FICA on net profits and IRS notices start piling up. Art Troast, a New York City-based CPA and owner of Troast Consulting, noted the solution isn’t always easy to swallow.

“The FICA rate is 15.3 percent and an effective income tax rate when you combine federal, state and local is often 25 percent,” Troast says. “New business owners never imagine they have to set aside 40 percent of their net profit for taxes.”

Unfortunately, they do. Letting a payroll service handle the payroll tax paperwork and working with a certified public accountant to create an estimated tax regimen is the best route for avoiding IRS or other agency penalties. This will let you know how much net profit you can invest in your business and use as your income, while ensuring those taxes get paid and filed in a timely fashion.

The other popular small business status, an S-corporation, carries its own tax nuances. Whether you place yourself on payroll or use net profits for your own income is your choice. In hopes of reducing the FICA and income tax burden, some S-corp owners will place themselves on payroll and set their salaries very low. What they don’t realize often hurts them: The IRS and state revenue agencies can “recategorize” the net profits owners dip into as wages.

Workers’ Comp-lications
Workers’ compensation and disability insurance are mandatory. The only businesses exempt are those where the owner is the sole employee. The minute you add that first employee, you’re obligated to purchase workers’ comp and disability insurance.

Yet many small business owners go without, either assuming they’re exempt or hoping no one will check into it. Fines for workers’ comp noncompliance, in particular, can be devastating, and not knowing isn’t an excuse in the eyes of the government.

“Everyone with employees needs workers’ compensation,” Alter says. “Luckily for small business owners, the Internet has enabled services such as ours to make it simple to add a convenient, pay-as-you-go workers’ comp plan so you can avoid the fines and headaches that operating without the proper insurance policy can create.”

While these three pitfalls are the most common and easy to avoid, others will surface. Trusting a payroll service to handle all of the payroll taxes and compliance lets you focus on your business. And remember: When in doubt, seek advice.