As some legislation is still pending regarding Federal and some provincial tax changes, this draft version has only been updated to reflect changes known as of May 16^th. These changes include new personal tax credit amounts for Manitoba, Nova Scotia and Saskatchewan as well as income tax rate bracket changes for New Brunswick.  A fully revised publication containing all changes effective July 1, 2011 is slated to be released around mid-June.

Visit the CRA website to access this publication as well as the previous version for tax changes effective January 1, 2011.

The legislation increases marginal income tax rates for those with taxable incomes of more than $100,000 for joint filers; $50,000 for single filers and married filing separately; and $80,000 for heads of households.  According to a legislative analysis of the budget, the legislation does so by: 

• increasing the number of tax brackets from three to six;
• splitting the existing 5 percent bracket into four brackets and adding three higher marginal tax rates to that taxable income;
• increasing the top marginal income tax rate to 6.7 percent from 6.5 percent;
• and reducing the taxable income for the 6.7 percent rate bracket by half

The measure also phases out the lowest (3 percent) income tax bracket starting with Connecticut adjusted gross incomes of more than $100,500 for joint filers; $56,500 for singles; $78,500 for heads of household; and $50,250 for married couples filing separately.  The legislative analysis said it does so by subjecting increasingly less taxable income to the 3 percent income tax rate as Connecticut adjusted gross income increases and moving the phased-out taxable income to the 5 percent bracket.

The Department of Revenue Services plans to have new withholding tables available within a month.  Please visit the Connecticut DOR for more information.

Section 195 of the New York Labor Laws has been updated with the new requirements and pay notice templates for employers are available on the NY DOL website.  The DOL has also issued Frequently Asked Questions about the Wage Theft Prevention Act.   Visit www.labor.ny.gov for more information. 

The Affordable Care Act provides that employers are required to report the cost of employer-provided health care coverage on the Form W-2.  Notice 2010-69 made this requirement optional for all employers for the 2011 Forms W-2, generally distributed in January 2012, to allow employers additional time to make the appropriate changes to their payroll systems.

Notice 2011-28, issued on March 29, provided further relief for smaller employers (those filing fewer than 250 W-2 forms) by making this requirement optional for them at least for 2012 Forms W-2, typically furnished to employees in January 2013.  This treatment for smaller employers would continue until further guidance is issued by the IRS. 
 
Notice 2011-28 also includes information for employers that are subject to this requirement for the 2012 Forms W-2 and those that choose to voluntarily comply with it for either 2011 or 2012. The notice includes information on how to report, what coverage to include and how to determine the cost of the coverage.

All guidance issued by the IRS can be found at www.irs.gov.

Effective May 1, 2011, new withholding tables for the Yonkers resident income tax surcharge will be issued to ensure that the correct amount of Yonkers tax will be withheld for tax year 2011. Therefore, taxpayers should not need to adjust their Yonkers withholding for tax year 2011 because of the rate change. However, taxpayers that have requested their employers to withhold additional amounts of Yonkers tax using Form IT-2104, Employee’s Withholding Allowance Certificate, may choose to increase the additional amount withheld to account for the increase in the Yonkers rate.

The Yonkers nonresident earnings tax rate was not changed and will continue to be imposed at the rate of .5% on wages and net earnings from self-employment.

http://www.tax.ny.gov/pdf/memos/income/m11_2i.pdf

Any amounts that have been withheld from employees but not yet remitted to the County should be paid back to the employees from whose paychecks the amounts were withheld.  It has not yet been determined when the amounts previously levied and collected under the invalidated statute will be refunded to employees.  This determination will be made by the Circuit Court of Jefferson County at a later date.

http://jeffconline.jccal.org/home/jcinfo/occ-tax0311A.pdf

Generally, employers can take a credit against their FUTA tax for amounts paid into state unemployment funds. The credit may be as much as 5.4% of FUTA taxable wages.  If an employer is entitled to the maximum 5.4% credit, the FUTA tax rate after credit is 0.8% (this will decrease to 0.6% after June 30, 2011).

Employers are entitled to the maximum credit if they paid state unemployment taxes:

• in full,
• on time,
• on all the same wages as are subject to FUTA tax, and
• as long as the state is not determined to be a credit reduction state

Federal Form 940 can be used to help determine the credit.  The Circular E, Employer’s Tax Guide, has more information on FUTA rules.

Chief Counsel Advice 201105039, prepared by the Office of Chief Counsel, notes that employers may not elect to pay either U.S. or foreign Social Security tax if the employment is subject to U.S. FICA tax under a totalization agreement.  U.S. Social Security tax must be paid on subject wages and an employer’s failure to do so and issue W-2 forms when required could have an adverse effect on the employee’s Social Security coverage.

Congress has expressed some concerns about the IRS fully enforcing the U.S. FICA tax rules on employers when they have employees working oversees.  Chief Counsel believes that an IRS policy of FICA tax forgiveness where the employer pays foreign Social Security in error rather than U.S. Social Security taxes would be difficult to defend and would lack legal justification.

Section 3121(I) of the Internal Revenue Code allows employers to make a future election to pay U.S. FICA taxes in situations where foreign Social Security taxes would otherwise apply.

For more information visit http://www.irs.gov/businesses/small/international/article/0,,id=105254,00.html

In addition, the Health Care and Education Reconciliation Act of 2010 amended the IRC effective March 30, 2010, to extend the general exclusion from gross income for medical care reimbursements under an employer-provided health plan to include reimbursements for an employee’s child who has not attained age 27 as of the end of the tax year. Prior to the above legislation, an employee wouldn’t have received these benefits unless the child was the employee’s dependent.

Some states conform to the current version of the IRC: Colorado, Connecticut, Delaware, District of Columbia, Illinois, Kansas, Louisiana, Michigan, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Rhode Island, and Utah.

The following is a list of the latest information on whether a state that doesn’t conform to the current version of the IRC has adopted the federal rules.

• Alabama conforms to the federal tax treatment of medical care reimbursements, but it does not allow employer-provided coverage under a health plan to be excluded from the employee’s gross income.
• Arizona has not yet adopted the federal provisions. The Arizona Legislature will consider a bill to retroactively conform to the federal changes during the current legislative session.
• Arkansas has not yet adopted the federal provisions. The Arkansas General Assembly is currently in session for the first time since the federal legislation was enacted.
• California does not conform to the federal provision that excludes the value of employer-provided health insurance premium payments for an employee’s nondependent adult child under the age of 27 from gross income. As a result, the reporting of the insurance premium wage amount on Form W-2 will be different for California and federal tax purposes (see FTB Tax News Alert, 1/24/11, and EDD Tax Branch News #122, 1/24/11).
• Hawaii conforms to certain IRC sections as of April 1, 2010, but not to the federal health benefits legislation noted above.
• Idaho conforms to a version of the IRC that was enacted prior to the federal health benefits legislation. A retroactive federal conformity bill will be introduced in the upcoming legislative session.
• Iowa has announced that it is conforming to the federal provision that allows the value of employer-provided health insurance coverage for an employee’s child to be excluded from the employee’s gross income through the end of the taxable year in which the child turns age 26 (see Iowa Department of Revenue Notice, Health Care Coverage for Nonqualified Dependents, 12/23/10).
• Kentucky has not adopted the federal provisions. It is advising employers, effective Jan. 1, 2011, to treat the amount of health insurance paid for adult children as being paid with post-tax dollars for Kentucky income tax purposes if the amount paid for those adult children would not be eligible for the gross income exclusion under the IRC in effect on Dec. 31, 2006. There will be differences between federal and Kentucky wages on Form W-2 (see DOR 2010 Employer Health Insurance Notice, 12/27/10).
• Maryland adopted the above federal provisions, but not until Jan. 1, 2011.
• In Massachusetts, the value of health insurance coverage for an employee’s child under 27 years of age is now generally tax-free to the employee if the coverage was provided under a Code Sec. 125 cafeteria plan.
• Minnesota has not yet adopted the federal legislation. There will be differences between federal and Minnesota wages on Form W-2 (see DOR December 2010 Withholding Tax Announcements, 12/1/10). The 2011 Minnesota legislature may elect to adopt the federal provisions retroactively.
• Mississippi conforms to the new federal rules.
• Ohio follows the federal rules and extends the exclusion to children who are 28-years-old.
• Oregon has not yet adopted the federal legislation. There will be differences between federal and Oregon wages on Form W-2 (see Oregon DOR News Release, 12/2010). The 2011 Oregon legislature may elect to adopt the federal provisions retroactively.
• In Pennsylvania, the health benefits and contributions for an adult child under the age of 27 are excluded from Pennsylvania gross income if provided under a Code Sec. 125 cafeteria plan.
• South Carolina conforms to a version of the IRC that was in effect prior to the federal legislation. Until the state legislature addresses the federal legislation, South Carolina employers are required to add back the income that was excluded under the new federal law.
• Virginia will follow the federal rules until the matter has been addressed by the Virginia General Assembly.
• Wisconsin has not adopted the federal legislation. There will be differences between federal and Wisconsin wages on Form W-2 (see Wisconsin News for Tax Practitioners 08/03/2010, 08/03/2010).

The draft form has several changes, including calculations to reflect the 2011 reduction of the employee portion of the Federal Insurance Contributions Act (FICA) tax. For wages earned in 2011, the employee Social Security tax rate is 4.2 percent and the Medicare tax rate is 1.45 percent.  The draft form warns employers not to complete lines 6a-6d, which are reserved for future use. On Form 941 for 2010, the lines deal with exempt wages and tips paid to qualified employees during a quarter.

 Visit the IRS website for more details.