Our Taxing Times

Take Control of Your Taxes

This is not a post about making a tax resolution that won't be kept. I want to make a few simple suggestions that could save you grief a year from now.

1. Check your withholding. If you have been coming up with a balance due when your taxes are prepared, this might be the solution to that problem. No more possible deductions? Then you might have to face the fact that a little more needs to come out of your pay. And, whether or not you change your W-4, keep an eye on your pay stub. Federal withholding should increase this year since the Making Work Pay Credit ended. Does yours? Then there could be a data entry error or computer glitch that changes your withholding accidentally. Check a pay stub early in the year and anytime the check doesn't seem right. The longer it takes to catch a withholding error, the harder it is to fix it.
2. Plan for changes. Retiring? Buying a house? Becoming an empty nester? All of these could impact your taxes. Talk to your preparer or do some research to find out how your taxes could change and what you can do to take advantage or plan for the change.
3. Emergencies can effect your taxes. Lose your job and need to draw from a retirement plan or  draw unemployment? A health issue that changes your income? Find out what is taxable. Please understand that the withholding that comes out of your retirement plan or unemployment doesn't "cover" the taxes. Your taxes are based on all your income, not just the emergency money. Their withholding is generally a set percentage (unless your specify otherwise) and that may not be enough in your situation.
4. All tax info is not the same. He may be the best barber in the world but that doesn't mean he knows anything about taxes. Don't disregard the advice you receive from non-tax professionals. But do check out what they are saying for the full story.
5. All returns are not created equal. It's tempting to compare your return to what you hear from co-workers and friends. But a single deduction or withholding set a little differently can be the difference between your refund and her balance due.
6. There is no magic deduction/credit. You are entitled to all the deductions/credits you legally qualify for, nothing more. Sometimes the only thing you can do is pay/pre-pay the tax.

As 2011 begins, take control of your taxes. If you don't understand something, ask your preparer or do the research. You might not like the answer but it sure beats wondering if there is something else you could do. Wondering never solves the problem.

Payback Time.

It's Back! The worse tax credit/loan ever. Yes, the First Time Home Buyer's (FTHB) Credit is back. And even though we knew it was coming, it doesn't make it any less onerous to have to deal with. And now we will have to deal with this for the next 15 years.

Let's review. The first version of the FTHB was available for taxpayers who had not owned a home for the last 3 years. If they bought their home between April 8, 2008 and December 31, 2008, they could qualify for a refundable credit. The credit was 10% of the purchase price up to a maximum of $7500. And it wasn't really a credit. The FTHB "credit" was actually an interest free loan. By claiming the FTHB, the taxpayer agreed to repay it over 15 years beginning on their 2010 tax returns. The amount of repayment is the FTHB divided by 15. If the full credit of $7500 was claimed, the taxpayer will have to add a $500 repayment each year to their tax return for 15 years. The full amount of remaining credit has to be paid if they sell the house for a gain or stop using it as their personal residence. (If the gain on the sale is less than the remaining payback, the repayment is limited to the amount of the gain.) The other 2 versions of the FTHB did not have the repayment clause as long as you kept it your personal residence for 3 years.

While I haven't seen one yet, I understand that the IRS has started sending out letters to taxpayers who claimed the first round of FTHB to remind them that they will have to begin payback on their soon to be filed returns. Form 5405 will have to be submitted each year to document the repayment.

I am sure that many of those taxpayers didn't think this day would come. They hoped that Congress would stop the repayment before it started. After all, they didn't include a repayment clause in the second two versions of FTHB. And I am sure they will be little repayment from all the fraudulent claims (especially the ones from prison) But Congress didn't clean up their mess and honest taxpayers will pay the price. So the stupidest tax "credit" will be with us for a long time to come.

HRB Is Out of The RALs Business...

...at least for now.

H & R Block announced on Christmas Eve the they have been informed by HSBC that the Office of the Comptroller of the Currency (OCC) has prohibited them from offering refund anticipation loans (RAL) for filing season 2011. HRB and HSBC had worked out an agreement that would allow HRB to offer RALs this year (even though HSBC did not want to). Basically, HRB would have covered the losses HSBC would suffer due to offering the RALs with no debt indicator. The OCC put an end to that agreement. It has also left HRB in the same position as many other tax preparers-scrambling to get some kind of refund program in place before tax season begins. It looks like most of their offices will have a form of Refund Anticipation Check (RAC) but HRB is still working on getting a program back in place.

The next question is if the FDIC will now step in and prohibit the remaining banks (who are not covered by the OCC) from offering RALs. This season keeps getting stranger and stranger.

 

Background:

It's Not Over.

Dying a Slow Death.

Fallout from Congress' Tax Procrastination

Congress messed around too long. Last week, they finally passed the AMT patch, an estate tax patch and the tax extenders to the relief of tax professionals everywhere. But.... Today the IRS announced that there will be items which will not be ready to e-file when electronic filing opens up on January 14th (IR-2010-126). They will not be able to get the all the changes re-programed and tested by mid-January. In fact, they expect it to be mid to late February before e-filing can begin for these deductions. And actually it doesn't matter if the return is e-filed or sent on paper, processing will be delayed. What are the hold ups?

• The first is the Educator Expense Deduction.This one allows teachers to take classroom expenses (up to $250 per taxpayer) as a deduction in the adjustment section of the return.
• Next is the Higher Education and Fee Deduction. It is also an adjustment item. While it is more beneficial for most taxpayers to use the Education Credits, this deduction can help taxpayers who have a little higher income or high state tax.
• Schedule A. Since the recently extended sales tax deduction passed though this form, the whole form is on hold.

The IRS is working to get the forms updated, tested and sent to the software companies so that they can make their changes. And hopefully they will be ready before mid to late February. Can this tax season get any more crazy?

 

Yes, You Have to Wait for Your W-2

This seems to be a tradition on this blog but it is worth repeating:

You can not file a 2010 tax return from a pay stub for several months. You will have to wait until your employer(s) have issued their W-2s.

Sorry, if you send in a paper return, the IRS will request the W-2 before they process the return. And no reputable preparer will e-file the return without the W-2. And right now, the question of e-filing is moot since the IRS will not open e-filing for 2010 returns until January 14, 20111.

So what about the TV and radio ads you have been hearing promoting cash with your pay stub? It's a loan that the business is making based on the potential of a refund based on your W-2. You still have to have your actual return prepared, file the return and then come in to pay off the loan. These are not RALs as many taxpayers are use to using. These loans could be in cash or on a debit card, it's up to the lender as are the actual repayment rules and interest rates.

So if you opt for one of these loans, do you homework concerning rates and payback and make sure you file your return when you get your W-2s. And please remember, employers have until January 31, 2011 to get W-2's in the mail.

 

Identity Theft and 2010 Taxes

Identity theft is a major problem and I am sure it is ruining Christmas for lots of people. If you have been a victim of identity theft and have not contacted the IRS you need to to that ASAP. Besides using your SSN and other IDs to rack up debt, identity thieves will also file fake tax returns with you info. To start the IRS's process, you will need to submit to them a Form 14039 with copies of the police report and your IDs (SS card, driver's license, passport. That will alert the IRS to a potential fraudulent return. They may also send you ( and should send you if you have previously reported identity theft to them) a CP01a notice. This notice has a special 6 digit IP PIN number the victim will use when they file their 2010 tax return. This IP PIN is suppose to minimize processing delays by identifying the real taxpayer's return from a fraudulent one. If you get this notice, do not lose it. A lost CP01a and IP PIN can not replaced. A new IP Pin will be issued each year until the issue is resolved.

The IRS has a special unit, the Identity Specialized Unit dealing with identity theft issues. They can be contacted toll-free at 800-908-4490.

Licensing - Paper Apps

If you chose to apply for your PTIN by mail with a W-12 and still haven't received a response, don't feel bad because 27,000 of your fellow preparers are in the same boat. The IRS is working as fast as they can but they admit that they have a pile to work through. In fact, 1700 applications  have been waiting for 6 or more weeks. The 1700 are generally applications with issues that the IRS is trying to resolve.The biggest problem is matching the name on the W-12 to the tax return.

Because of the backlog, the IRS is not cashing the application fee checks until they have successfully issued/reissued the PTIN. In the meantime, the preparer can apply online. When the IRS gets to their paper application and finds a duplication, they will return the application and check to the preparer.

At Last, Creon!

When I was in college, I was in a production of Anouith's Antigone. The short version of the story - Antigone has defied her uncle King Creon and buried her traitor brother even though it means she will die also. Creon spends most of the play trying to justify not killing his niece. When he finally makes the hard decision, Antigone crys out, "At last, Creon!"

That line was the first think that came to mind when I heard that the tax bill passed. I felt a mixture of surprise, relief, anger and frustration. I had expected this to drag on to next week and I was surprised that the House passed the bill. I am relieved that the drama is over and the tax prep industry and IRS can get to work on all the things that need to be done before 2010 return filing begins. I am mad that our elected officials played around with these issues until the very last minute. Most of this could have been done years or months ago. Since the bill is basically a patch and doesn't fix the problems, I am frustrated that there will every be true tax reform.

For now, we have an AMT patch, the tax extenders have been extended again, and there is an estate tax. I may not like all of the results but now I can work on my newsletter.

Details

 

Rentals and 1099s

Beginning in just a few days, landlords will have a new complication to renting their properties. As if dealing with renters who don't want to pay their rent or trash the house when they leave isn't bad enough, landlords will have to begin issuing 1099MISC to any service providers they pay $600 or more over the course of the year.

An example: Ann owns a small house that she rents to a young family. This year when Ann hires Dave the plumber to fix a broken bathroom sink, She can just use Dave's invoice (and the check if Dave is paid by check) to document the expense. Ann will use the Schedule E to report the income and expenses she received/paid. The profit or loss from the rental will go against the rest of her income on her 1040 return. Next year, Ann will still use the Sch E to report her income and expense and take the result to her 1040. But she may be required to send Dave a 1099 MISC for the amount she paid him over the course of the year. If she pays Dave over $600 in a year, she is now required to send him the 1099. The number of jobs doesn't matter or the amount of each job. It's the total dollars for the year. For rentals, the taxpayer just needs to issue 1099s for services not for materials used. And it looks like she will have to track and issue 1099MISCs to not only individuals but any type of business entity.

Both sides of the transaction will have new responsibilities under these rules. Ann will have to get an Employee Identification Number(EIN) for her rental business. And she will have to get the SSN or EIN from anyone who provided her a service. She can use a form W-9 for that. And Dave will have to give her that info. Then by February 28 each year she will have to issue a 1099MISC to any individual or business she paid over $600 that prior year for the amount she she actually paid by cash or check (payments by debit or credit cards don't count). Ann must also send a copy to the IRS and there may be state reporting requirements too. Dave will have to make sure that his bill break out the cost of the services and the cost of materials used on the job. And he will have to make sure he reports the income on his tax return. Even when he's paid with cash.

What if Ann decided that this is too much work and doesn't issue 1099s? First, I would have an issue deducting the expenses especially if I know Ann knew about the reporting requirements. So, more tax on her 1040. Then the IRS could get involved. Part of the Small Business Job Act of 2010 is a provision increasing the fees for not sending 1099s when they are required. The amount of the penalty will depend on how late the 1099s are.

This is not the only change in 1099MISC reporting to come out of Congress this year. In the health care bill, business reporting requirements were greatly expanded. The basic issue is the tax gap. The amount that is actually reported on tax returns compared to what the IRS believes should have been reported. The new 1099 requirements are designed to track who was paid, how much they were paid and make sure that the income is reported on their return.

21 Million Effected

In the Congressional tax mess we are currently living though, Alternative Minimum Tax (AMT) seems to be forgotten. There is plenty of media coverage about the Bush tax cuts being (or not being ) extended and the Estate Tax but AMT is actually the more pressing problem. For 2010, we have an estate tax and we have the lower tax rates of the Bush tax cuts but we don't have protection for 21 million taxpayers against AMT.  21 million are the number of taxpayers who didn't pay AMT in 2009 but will in 2010 unless Congress does something constructive.

Three years ago I wrote a post called "A Nasty Tax Surprise" about the lack of Congressional action on AMT. This year the  problem is the same only worse.  In the 2007 article, I mentioned a family of six with $70,000 income.  If AMT had not been fixed, they would have paid $1444 more in 2007 tax because of AMT.  If nothing is done this year, they same family and income will pay $1829 in AMT on top of their regular tax. That family will only need $54,000 in income before they will see AMT ($69).

The IRS is ready to go. They are assuming Congress will do their job and patch AMT before they go home for Christmas. If Congress doesn't at least fix this, tax season may be delayed while the IRS takes out the AMT patch we've all been promised for months. While I hope they take care of the AMT, tax extenders and the Estate tax, I will settle for an AMT patch. Think of it as my Christmas present from Congress.