tax return
What’s a 1099-K?
Friday, February 3rd, 2012 | consulting, tax | No Comments
Have you received a 1099-K this year? This new form reports electronic financial transactions. If your business takes debit or credit card payments, then you will receive a 1099-K if you process more than $20,000 AND more than 200 transactions.
Business tax returns contain a new line to report 1099-K amounts. For this tax season though, the IRS is deferring the requirement that you report your 1099-K income on this line. Instead, report your gross receipts as you have in the past on the appropriate line of the form. Forms 1065 and 1120 contain the instruction, “For 2011, enter zero.” The IRS has issued an advisory that tells filers of Form 1040 Schedules C, E, and F to do the same.
We anticipate that this will necessitate some record-keeping changes in 2012; for example, accounting for tips charged to a credit or debit card. We are assessing potential impacts of the new reporting requirements and advising our clients.
6 Year-end tax reduction tips
Wednesday, December 21st, 2011 | tax | No Comments
Use these six tax reduction tips to reduce your 2011 tax bill, but act before December 31, 2011.
- Make charitable contributions by December 31. Keep a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations. Donations charged to a credit card by Dec. 31 are deductible for 2011, even if the bill isn’t paid until 2012. If you donate clothing or household items, they must be in good used condition or better to be deductible.
- Install energy-efficient home improvements such as insulation, new windows and water heaters to your main home for a tax credit of up to $500. The work must be finished by December 31.
- Adjust your investment portfolio and consider selling gaining and losing investments. Capital losses offset capital gains. Up to $3,000 of any excess capital loss per year offsets other income, and any leftover loss may be carried forward to reduce future tax bills.
- Contribute the maximum to retirement accounts such as 401(k) and similar workplace retirement programs by December 31 to reduce taxable income. You have until April 17, 2012, to set up a new IRA or add money to an existing IRA and still have it count for 2011. Generally, you can contribute up to $5,000 to a traditional or Roth IRA, and up to $6,000 if age 50 or over.
- Make a Qualified Charitable Distribution from your IRA to a qualified charity if you are age 70 1/2 or over. The maximum annual exclusion from gross income for QCDs is $100,000. It is available even if you do not itemize deductions.
- Take the Small Business Health Care Tax Credit if you are a small employer who pays at least half of your employee health insurance premiums. This calculation is tricky, so consult your tax professional for assistance.
Remember to save receipts and records related to your taxes so that you can make sure your return is accurate and you can get the maximum tax reduction available to you.
Estate tax filing relief
Thursday, September 15th, 2011 | tax | No Comments
The IRS has provided some estate tax filing relief for executors of the estates of those who died in 2010. Notice 2011-76 provides an automatic extension of time to file and pay the estate tax due. The rules generally apply to estates exceeding $5 million.
The estate tax was repealed for 2010 and was replaced with a complicated carryover basis calculation to determine the value of inherited assets. Congress reinstated the estate tax retroactively and let executors choose whether to be governed by the estate tax rules or opt out and use the carryover basis rules, adding another layer of complexity. As a result of the new law, guidance and forms were delayed. Updated instructions for Form 706 were posted only recently, and Form 8939 to make the election is still in draft form.
The IRS has changed the due date of Form 8939 to January 17, 2012. This is not an extension, so an additional form is not required.
For executors who timely filed an extension to file the estate tax return on Form 4768, the extended deadline is now March 19, 2012 for most decedents. For dates of death between December 16, 2010 and January 1, 2011, the extended deadline is 15 months after the date of death.
The notice also provides late-filing and late-payment penalty relief, although interest will still be charged for tax not paid by the original due date of the return.
Filed an extension - now what?
Thursday, April 28th, 2011 | consulting, tax | No Comments
You pulled your records together and worked on your tax return, maybe using an “easy-to navigate” software program. But you were left with a nagging feeling that there may be something you missed, so you filed an extension.
Now what?
We’ve received calls from several people in this situation, asking us if we would take a look at their returns. This is a smart call if you have items on your return that are new for this year, or if an unusual event occurred in 2010. The mainstream tax software is designed to be easy for the average user, with questions that take you step-by-step through your return. In their effort at simplicity, sometimes the questions gloss over details in the code that might be important in your particular situation. Sometimes your answer directs the software to another module and list of questions, or to skip some questions. If you answer incorrectly at this stage, you may be messing up without knowing it.
In one recent case, a husband and wife used one of the name-brand tax programs to do their return, which included a business. Because of the way the software asked the questions, they inadvertently entered the same business information in two places on the return, doubling their income. Because of the software’s design, they did not become aware of the error until after they had e-filed the return.
The errors prompted a barrage of notices from the IRS and an audit of their return. They are now spending a lot of time, effort, and money to resolve these issues. The excuse, “it was the software’s fault,” has been tried all the way to Tax Court, and it has failed at every turn.
So if you are not confident that your self-prepared tax return is correct and that you have claimed all the deductions and credits to which you are legitimately entitled, you are smart to have filed an automatic extension. The next step is to gather your records and make an appointment with a tax expert like us. We can review your return and your financial situation to make sure your tax return is accurate and complete and your tax bill is as low as possible.
We’ll also advise you about the possible audit risk of your return. The IRS has been stepping up its examination of such items as employee business expenses, businesses reported on Schedule C of Form 1040, business mileage, and other areas. This means that good recordkeeping is more important than ever to prove that your deductions are legitimate.
Contact us today to quiet those nagging doubts about your return.
Bad tax preparer leads to audit trouble
Thursday, March 24th, 2011 | tax | No Comments
We recently met with a new client who had been invited to the IRS local office for an examination of two years of her tax returns. She called the tax preparer, who told her she would not need the preparer at the meeting (red flag number one). After the meeting, she called the preparer back for help, but the preparer was not available (red flag number two). She has not been able to reach the tax preparer since then (red flag number three).
At the IRS meeting, she was shocked to learn for the first time that several items on her tax return were incorrect, mostly improper deductions. She came to us, and we opened her eyes to many ways that her tax preparer had misled her. We will be able to help her minimize the damage, but she was very unhappy to learn that her tax preparer had botched her return, and that she would owe a big chunk of money as a result.
Here’s the catch-22: The tax laws are so complex, the average taxpayer cannot possibly keep up, but you bear the burden of the accuracy of your tax return. Whether or not you rely on a professional to prepare your return, you are personally responsible for everything on the return. You must have documentation to back it up. “That’s how the tax software did it” is no defense. So finding a reputable, credentialed professional who will talk honestly with you is a good investment. No one can guarantee that the IRS won’t have questions about your return, but the process goes much better if your return is properly and accurately prepared based on good records.
Until this year, there has been no federal-level program to ensure at least a minimum level of competency for tax return preparers. There still is no way to get feedback about a tax preparer’s competency or quality of work, other than word of mouth. There is no authority given to the IRS or any other agency that can be used to force bad preparers out of business, other than harassing their clients. Watch for those red flag warnings before trouble comes. A reputable CPA firm (us, for example) or enrolled agent is your best choice.
Most-overlooked tax deductions
Wednesday, March 23rd, 2011 | tax | No Comments
Here is a list of some of the most-overlooked tax deductions each year. Overlooking these deductions may cost you money by raising your tax bill, and the IRS seldom complains when you overpay your taxes. Check this list, and then call us to see how you might claim these deductions.
- State sales taxes. If you itemize deductions, you have a choice of deducting state income tax or sales tax, whichever is greater. Unless you have quite a bit of investment income taxable in Tennessee, you’ll want to claim sales taxes. In addition to the amount the IRS calculates for you, you can add sales tax for a vehicle and construction materials you bought yourself.
- Reinvested dividends. If your mutual fund or stock dividends are used to buy additional shares, each reinvestment increases your basis in the investment. This can make a big difference when you sell it in a taxable account because it reduces the taxable gain or increases the tax-saving loss.
- Out-of-pocket charitable contributions. Keep those receipts if you buy supplies for your favorite charity. If you drive your vehicle for charity, keep a mileage log so you can deduct 14 cents per mile.
- Student-loan interest. A child who is not claimed as a dependent can qualify to deduct interest paid by the parents on his or her return. The IRS deems the payments to have been given to the student, and the student to have paid the interest.
- Job-hunting costs. If you are looking for a new job in the same line of work, you may deduct away-from-home travel costs, ground transportation, employment agency fees, costs of printing resumes and business cards, postage, and other expenses related to the job search. But if it is your first job or the new position is in an unrelated field, the hunt is not deductible. This is an itemized deduction.
- Moving expenses. If your new job is at least 50 miles from home, costs of moving yourself and your household are deductible, including mileage if you drive your vehicle. Unlike the job-hunting deduction, you can claim this one for your first job, and even if you do not itemize.
- Overnight travel for military reservists. If you travel more than 100 miles and stay overnight for drills or meetings, you may deduct travel costs even if you do not itemize.
- Health insurance deduction. If you are self-employed, your health insurance premiums reduce self-employment tax for 2010 only, in addition to income tax.
- Child-care credit. If you take a payroll deduction for dependent care, that part is not available for the credit. But if you pay more than your payroll deduction, the excess may generate a tax credit, which reduces your tax dollar-for-dollar.
- Estate tax on income in respect of a decedent. If you inherited an asset such as an IRA from an estate that paid federal estate tax, you can reduce the tax you owe by the amount of estate tax that was paid on that asset.
- Refinancing points. Points you pay when buying a house are deductible in the year you pay them. When you refinance a mortgage, though, you may only deduct a proportional amount based on the life of the loan. It’s not much each year, but it counts. The remaining amount can be deducted in the year you pay off the loan.
- Jury pay turned over to your employer. If your employer continues paying your salary while you serve jury duty, you may be asked to turn over your jury pay to the company. You still must report jury fees as taxable income, so by deducting the amount paid to your employer, the tax hit is a wash.
- American Opportunity Credit. This modified version of the Hope credit covers all four years of college, is partially refundable, and is phased out at higher income levels than the old credit. The Lifetime Learning credit is also still available.
- Making Work Pay credit. Although this credit reduced your withholding throughout 2010, you must claim it on your tax return.
- Credit for energy-saving home improvements. The cost of certain energy-saving items installed in 2009 and 2010 is subject to a 30% credit up to $1500 for both years combined. Another credit is available for devices that use alternative energy sources.
- Sale of demutualized stock. If you received stock from an insurance company that switched from being policyholder-owned to stockholder-owned, a recent court decision affects you. When you sell that stock, you may reduce the tax you pay on the gain by reporting your basis in the stock.
- Home-buyer credit. This credit was expanded to long-time homeowners before it ended. If you closed on, or entered a binding contract on, a home before April 30 2010, you may qualify.
Remember to talk with your tax adviser to learn how these deductions may apply to your unique situation. It often pays to have an experienced professional like us to prepare your tax return. If you offer full disclosure of events over the past year to your tax preparer, you may trigger questions that can lead to tax savings. As we prepare your return, we also watch out for items that may be more likely to trigger questions from the IRS, and we’ll discuss them with you. You’ll rest better knowing that your tax return was prepared by an experienced team of experts.
Last-minute filer? Risky!
Tuesday, March 15th, 2011 | tax | No Comments
Studies have shown that people who wait until the last minute to file their tax returns make more errors and miss tax breaks. As you are gathering your records, think back through last year’s events and transactions. Make a list and ask your accountant about them. You may be surprised to find out that they have an income tax impact.
Kiplinger magazine publishes its list of the most-overlooked tax breaks:
- State sales taxes,
- Reinvested dividends,
- Out-of-pocket charitable contributions,
- Student loan interest paid by parents,
- Job-hunting costs,
- Moving expenses,
- Military reservists’ travel expenses,
- Health insurance deduction to reduce self-employment tax,
- Child care credit,
- Estate tax on income in respect of a decedent,
- State tax paid last year,
- Refinancing points,
- Jury pay turned over to your employer,
- American Opportunity credit,
- Making Work Pay credit,
- Credit for energy-saving home improvements,
- Bonus depreciation on business asset purchases,
- Stock received in a demutualization,
- Home buyer credit.
Call us with questions about any of these items, or any other events in your life in 2010. We recommend that you pull together your information and questions and get them to us now so we will have time to do our best work for you.
Business tax form update
Monday, March 14th, 2011 | tax | No Comments
Due to extender provisions in the Tax Relief Act enacted on December 17, 2010, the IRS delayed accepting some business tax forms, as we posted previously. The IRS has recently announced updated information for these tax forms on irs.gov.
Form 941 for first quarter 2011 now may be filed. The due date is May 2, but early filing is necessary in some cases. Form 1120-PC and Form 8849 (Schedule 3) may also be filed. A date of April 16 was also announced for accepting Forms 706, 706-NA, and 709.
Making Work Pay Credit
Thursday, March 10th, 2011 | tax | No Comments
The Making Work Pay Credit is an income tax credit available to most taxpayers with earned income. We’ve talked to several folks who were unfamiliar with the Making Work Pay Credit, which is available only on your 2010 individual tax return. One of them was surprised when her refund was $400 more than she calculated, and she wanted to make sure the IRS was not mistaken before she cashed the check!
The credit is calculated as 6.2% of earned income, which for most taxpayers is W-2 wages. Self-employment income (or loss) also is factored into the earned income total. The maximum credit is $400 per person; married couples filing joint returns may be eligible for up to $800. If your earned income is more than $95,000 for single filers or $190,000 for joint filers, the credit is phased out. You are not eligible for the credit if you can be claimed as a dependent on someone else’s return.
The Making Work Pay Credit is claimed in the Payments section of the tax return, rather than the Taxes and Credits section. This may be why some filers miss claiming the credit. Form 1040 (long-form) filers also must submit Schedule M to calculate the credit. Make sure you claim it if you are eligible.
One friend who filed her own 1040-EZ return overlooked the Making Work Pay Credit, and she was surprised when her refund was greater by $400. The IRS had recalculated her overpayment to include the credit. It’s nice to know that the IRS computer adjusted her return, but will it catch them all?
As always, there are details that we cannot cover here, so check with your tax adviser to find out how the Making Work Pay Credit applies in your particular situation.
IRS not ready for some 2010 tax returns
Tuesday, February 1st, 2011 | tax | 1 Comment
The Tax Relief Act extended several tax credits and deductions that expired at the end of 2009. As a result, the IRS has delayed processing of several 2010 tax returns. The delays impact these returns:
- Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return
- Form 941 (First Quarter 2011), Employer’s Quarterly Federal Tax Return
- Form 709, Gift Tax Return
- Form 706, Estate (and Generation-Skipping Transfer) Tax Return
- Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return for non-resident
- Form 8849 Schedule 3 (Calendar year 2011), Certain Fuel Mixtures and the Alternative Fuel Credit
The delay affects both paper and electronic filers. We can prepare these returns and hold them until the IRS is ready to process them. The starting date for these returns will be announced in the future by the IRS.
We had previously posted that IRS processing of certain individual tax returns will begin on February 14. This date has not been changed, but it does not apply to the forms listed above. We will keep you posted as we learn of developments.