Our Taxing Times

Do Overs

Do Overs.

How often as children playing with friends have we called out for the chance to do our turn over again. Maybe we’ll get a better result this time. It’s frustrating that as adults we can’t do over events. But with our income taxes, we have a chance to do over our tax return.

When a taxpayer needs to change the return they originally filed, they can do just that on form 1040X. An amended return can be filed for income or expenses which were omitted on the original return, to change filing status or dependents or to take advantage of missed credits. An amended return might also be used to respond to an IRS notice.

No matter the reason, the procedure is the same. Form 1040X is used to report the changes. The first page has three columns. The left column shows what was on the return the taxpayer originally filed. The center column documents the changes being made. The right hand column shows the corrected figures. On the second page, there is an area to list name and SSN for any dependents being added to the return and a place to explain what changes are being made.

The 1040X can be a little tricky so a few suggestions.

• Make sure you have a copy of the original return saved before you start making changes. Once you have completed the amended return, save that return separately.
• If the amended return shows a refund, it has to be for an open year or you won’t get they money. You have 3 years from the tax return’s due date or 2 years from when the tax was paid to request a refund.
• If you end up owing on the 1040X, don’t be tempted to hold off filing the 1040X to see if the IRS catches the error. Waiting for the IRS to contact you could mean higher interest and penalties.
• Prepare one 1040X for each year and mail them separately.
• This might be a good time to get a tax pro to help you. If you choose to do it yourself, take it slow and follow the instructions. It might be easier to do a 1040 return incorporating the changes first. That way you have the information you need for the left and right column and can easily calculate the adjustment column.
• While you don’t need to send a full copy of revised return, you do need to send a copy of the supporting documents and forms for you changes. For example, if you forgot to take advantage of the education credits on your original return complete Form 8863 and include that form with your amended return.
• Amended returns still have to be mailed in to the IRS. They also take longer to process because they aren’t electronically filed. Give the IRS at least 6 to 8 weeks. New this year is the ability to track any amended return for this year or the last 3 years by using the “Where’s My Amended Return?” on the IRS website or by calling 866-464-2050. You’ll need the primary Social Security Number (1^st one on the return), the date of birth for that person and their zip code.
• Don’t forget to amend your state returns. The IRS and the state revenue departments compare notes about what each has on file. Again, take it slow as you prepare the return. Each state has their own format and many require a different form for resident amended returns as to non-resident amended returns. Also, check to see what documentation your state wants sent with the amended return. Generally, they want a full copy of the amended return you sent to the IRS.

You can get a do over on your tax return if you need to make changes to a return that has already been filed. Use a 1040X and don’t forget you state return too.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Extensions

There is only a little over 3 weeks left before your 2012 tax return is due. (We’re back to April 15^th this year.) So what if you can’t get your return done in time to file by then? You can file an extension. It can be done electronically or by filing a paper Form 4868 by April 15^th. And it does have to be postmarked or electronically filed by April 15^th. After that time, the extension won’t help you.

As the tax filing deadlines approach, I get calls from clients wanting me to file an extension for them. It’s easy to do electronically; set up a file and send. I don’t need signatures. What I do need is to know about what the client is going to owe so that they can pre-pay that.

The IRS gives individuals an automatic 6 months to file a return. The due date for 2012 tax returns is October 15, 2013. Of course; you can always file the return before that. BUT! An extension is not a delay in paying. It just means you want more time to get all your info together to file a complete return. If you know you will be getting a refund, you really don’t have to file an extension. The extension gives you protection against the failure to file penalty if you make a good faith effort to pay what you think you will owe. Underestimate your final tax and balance due too much and the IRS says they could add the failure to file penalty back. But if you send them too much now, you will get that back as a refund when you do file.

I just said that if you are getting a refund, you don’t need to file an extension but you should if you want to protect the right to elect a special tax treatment. Many elections must be filed with a timely filed tax return and that could include extended returns. For example, a net operating loss is generally carried back to prior years (the number depends on the IRC at that time). But you can elect to just carry the loss forward. But the statement must be filed with the return by April 15^th unless you file an extension on time. Then you keep the option available until the return is filed.

What to do? If your return is done and you just can’t pay the balance due, file the return. You can work out a payment arrangement. If you need more time to get all your paperwork together, estimate your taxes and pay that with an extension. If you’re sure you’re getting a refund, you don’t need an extension unless you want to protect a special election. File an extension if you owe (or as a protection if the estimate is close) and send them what you think you will owe. You can always file the extension but not pay anything but you have to be prepared for a notice wanting interest and penalties for not pre-paying your tax.

And don’t forget to check how your state handles extensions. Some will take the federal extension, while others have their own form to complete.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Why Is My Refund Short?

You were supposed to get a refund, Federal or state, and instead you receive a letter saying that your refund was being taken to pay a debt you owe. What’s going on and what can you do about it.

The IRS will offset (take) your federal refund for back child support, a state tax debt, or a federal debt. Generally those debts are back federal taxes and being in default on a student, VA or HUD loan. The operative work is default. The letter you receive telling you about the lost refund will tell you where the money is going. The first question is if you really do owe the money. It could be payments haven’t been credited to your account yet. If you disagree with the IRS about a tax debt, call them. Other debts are handled by Financial Management and you’ll have to talk to them. (800-304-3107) But don’t be surprised if you have to talk the organization you owed too.

If you do owe the money, the next question is how you are filing? If you are using any filing status but Married Filing Joint, congratulations you just paid down your debt. If you file Married Filing Joint, whose debt is it? If the debt belongs to both, like prior year taxes not being paid, you paid down your debt. But if the debt just belongs to one spouse, there might be a little relief using Form 8379, Injured Spouse Claim. The injured spouse, the one without the debt, might be able to get their part of the refund by filing this form. It asks that the taxpayers allocate income and deductions to each spouse and submit the form. The form can be sent with the return if you know you will have a problem or as a response to the letter you receive. The form only allocates it doesn’t calculate any refund. The IRS will do that based on the info on the form and if the state is community property or not.

The states will also take state tax refunds for debts. Taxes and child support are the most common but each state has their own list of debts. Kansas will collect for municipal debts like hospital, ambulance, and utilities. Also states are beginning to collect back taxes for each other. As with a federal offset, it may be possible to do an equivalent of injured spouse on a state debt once you are notified about the lost refund.

It’s disappointing to lose money you were counting on for other things. On the other hand, you are paying down your debt. And once the debt is satisfied, you’ll get a refund again.

 

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Catching Up On the News

Half over or half left, it depends on your point of view. Tax season is at the half way mark. I’m still working away on returns so this post is a collection of little notices and news items.

It looks like the remainder of IRS forms will be released to be filed next week. The IRS is doing live testing of the forms and my software company (Drake) will now allow returns with those forms to be uploaded to them and they will send them in when the IRS allows.

The IRS is reporting problems returns with Earned Income Tax Credit. They now require Form 8867 to be included with returns completed by paid preparers but they were receiving incomplete forms. When that happened, the IRS would hold the return and send the taxpayer a notice requesting the missing information. The Service has stopped holding the returns and are catching up the back returns. But if you receive the letter, you should still respond and get the IRS the info they are requesting.

The IRS is expanding the Voluntary Classification Settlement Program. This program allows employers to move employees they have treated as independent contractors to employee status. For all the details, please see Announcement 2012-45 and 2012-46. Employers have until June 30, 2013 to apply.

The IRS did not send out reminder letters to taxpayers who took advantage of the first version of the First Time HomeBuyer’s Credit and are now repaying the advance they received. It has put a FTHBC look up tool on their website so that taxpayers can check the status of their payback.

“Where’s My Refund” is a problem again this year. This year the IRS took a more conservative approach and did not give target dates. As a result, the online tool was swamped with taxpayers checking on their refund. The Service asked that taxpayers limit their checking to once a day (it’s only updated once a day) to cut down on the traffic. But now it seems that there are issues of the amounts being deposited not matching what the IRS say will be deposited. If this happens to you, give the IRS a little time to get a letter to you explaining why they changed the refund. If that doesn’t answer your questions, than you’ll have to call the IRS at the number on the “Where’s my Refund” response page.

The IRS is saying that the mandatory furlough caused by Congress’s failure to deal with the sequestration will not affect the tax season. They will hold off until after the filing season is over on April 15^th.

Back to returns.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

American Taxpayer Relief Act of 2012

Well color me surprised!

After reading everything that was coming out of Washington, DC about the fiscal cliff negotiations yesterday, I had very little faith that the House would pass the bill. But, to quote my Mom, bless their pointy little heads, pass it they did. Okay, so what did we get?

First and my favorite is the Alternative Minimum Tax fix. Not patch but fix. AMT isn’t going away but the exemption level will continue at the higher levels of the last few years and will be indexed for inflation.

Higher income taxpayers will be paying more in taxes. First, the highest tax rates will be going to 39.5% for taxpayers with $400,000 ($450,000 for married filing jointly) or more in taxable income. This is up from a 35% top rate. These taxpayers will also be paying higher tax rate on capital gains and qualified dividends. They will pay 20% as compared to 15% for everyone else. Finally, the phase outs for the itemized deduction and personal exemptions are back. Taxpayers with income more than $300,000 and $250,000, respectively, will start losing those deductions.

Lower and middle income taxpayers will still have the Earned Income Credit, Child Tax Credit and American Opportunity Tax Credit. These remain at the same level as 2011 but the extension is only for 5 years.

Some deductions which expired 12/31/2011 have been extended through 12/31/2013. These include the $250 deduction for teacher classroom supplies, the Higher Education Tuition and Fees deduction, the mortgage insurance premium deductibility and the charitable contribution from an IRA.

The Estate Tax is now set at 40% for estates over $5 million and it’s indexed for inflation.

There are a bunch of business credits and deductions which get another year. More about those in another post.

Besides the tax provisions, there were several other provisions included in ATRA. First is the extension of unemployment benefits for another year. The cuts in Medicare reimbursement for doctors are also delayed for a year. The farm bill fix is only for 9 months to avert the “milk cliff.” Finally, Congress will not get their 0.5% cost of living increase like other Federal employees. It’s been re-frozen.

What didn’t get into ATRA? The 2% cut in employee’s FICA contributions is gone for 2013. It’s back to 6.2%. Congress also didn’t deal with spending cuts or the debt ceiling and sequestration is delayed for 2 months.

That’s ATRA in a nutshell. As we put it into practice, I’m sure we’ll be hearing, and writing, more about it. But at least tax season can proceed even if some returns will have to be delayed while the IRS re-tools their systems for the last minute changes.

ATRA

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

IRS Prevention

Tomorrow, during the long football game commercials, I would like to suggest that parents do a little IRS prevention. I suggest that they talk to their children about their income tax. If you can’t do it then, then please do it before they get their W-2. Better yet, grab their W-2 before they see it and dollar signs.

Please understand that just because they are your kids and live in your house that you might not get to claim them as a dependent. And if they can be claimed as your dependent, you want to make sure that they understand that they can’t claim themselves.

(Warning – this is an overview! I’m skipping some stuff to make a point. Talk to your tax pro about your specific situation. Dependency issues are very tricky.)

Who can you claim? You can claim your child, step-child, foster child, brother, sister (and steps) or descendent who lived with you for more than 2012, was under age 19 at the end of 2011, and did not provide over half their support. If they were a full time student for 5 full months and under 24, you could still claim them since the time away at school is considered temporary if their permanent residence is with you.

The tricky part of the rules is that the child “didn’t provide over half their own support.” A teenager with a decent job could be actually providing more of their support than their parents. When we think of support, the first thing that pops into mind is the costs of providing room and board for the child. Add to that anything the parent pays for the child; insurance, cell phone, clothes, medical bills….But it also includes all the money the child spends on themselves from a job. A teen who made $8000 in 2012 and didn’t put (and leave) anything in savings could have $7000 (net income). That could be more than what the parents actually spent on them and mean the child gets the exemption not the parents. Could a teen make $8000 working fast food? Yes, I’ve seen it and the surprised parents. This is a situation where you want to bring a tax pro in and do a support worksheet to make sure nothing is missed.

Even in situations where it’s clear that the parent can claim the exemption for their child, they need to make sure that the child understands that they can’t claim themselves. If they do, there will be problems when their parent files their return claiming them.

The key point is there is only one exemption for everyone. If the parents take it, the child can’t. This is one time when a little family communication can help keep the IRS away.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Saving Electronic Records

The world is going electronic. No big news there. We are getting more and more info digitally; newspapers, bank statements and credit card bills, books. In the tax world, we’ve seen electronic return filing and direct deposits become the norm not the exception. Pay stubs and W-2s are delivered electronically. One thing which has stayed the same is the necessity to maintain proper tax records.

While we all need to have good records, too many taxpayers have not changed their thinking, and saving, to account for electronic records. Someone who saved every paper pay stub now doesn’t even look at the electronic pay record in their online employment account until there’s a problem.

An example. The company Jane works for stops giving out pay stubs to employees. She can go online to view her pay statement if she wants. Then the company closes with little notice. By February of the following year, Jane hasn’t received her W-2 and can’t get ahold of anyone from the company. She is still required to file a tax return with that income and in previous years she could have used her saved pay stubs to get the info she needs for Form 4852- Substitute W-2. But she didn’t get pay stubs from the company and she didn’t print or electronically save the statements from online. She could go back and use the online account if she can get in. But if the company has pulled that info, she’ll have to find out another way to get that info.

Other examples:

• Banks stopped returning canceled checks on most accounts years ago but now the little copies that were part of statements are being cut on many accounts.
• We’re ordering more online but don’t think of saving a copy of the invoice we get as confirmation by email.
• Everyone seems to be pushing electronic bills and statements instead of paper ones.

It used to be that part of doing their taxes for many clients was sorting through the pile of paper they had collected through the year to document their deductions. The electronic world has cut the amount of paper but not the need for the documentation. Taxpayers need to create systems to deal with this change.

My suggestion is to phase in to the new record keeping. Start with a system to save the records you receive electronically. Download and save your electronic pay statement to your computer every payday. Save a copy of the invoice anytime you order online. The same goes for all credit card and bank statements that aren’t paper. Once you have a system started, you can start duplicating the paper documents. A home scanner can be inexpensive and a lifesaver.

Once you’ve created a tax documentation system that works for you, don’t forget to back it up and to safely get rid of the paper documents. Electronic files need to back up regularly and there should be a copy offsite for extra security. It can be as simple as a backup on a USB drive that goes on your car key chain. Once you’re scanned your financial documents, shred or burn the originals so that someone dumpster diving doesn’t get info they need to steal you identity.

If the IRS questions the documentation for your tax return, you have the burden of proof. Blaming the bank for not giving you your cancelled checks or even the little copies won’t change the need for documentation. The best thing to do is start an electronic system now to keep the records you need should the IRS come calling.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

98 Days and Counting

Today is the due date for returns under extension. Taxpayers can still file returns but they lose the protection the extension gave them.

This is also the last day a return can be e-filed. This is very disappointing. I had hoped that with most returns transmitted under modernized e-file (MeF) we would get year around filing this year. But it’s not to be. A return not transmitted today will have to be mailed.

So, now is the time to look forward to tax season 2013. The date that is showing up in tax forums and boards as the first date we can e-file is January 22, 2013. That’s the day after Martin Luther King’s holiday. The same day as last year’s start. That is 98 days from today according to my program. The question is; will we actually be able to file then? The problem is Congress.

According to a report from the Joint Committee on Taxation, JCX 1-12, there are 101 tax provisions which expired in 2011 or will expire in 2012. And another 8 tax provisions relating to disaster relief for the 2 years will expire. While it’s doubtful that all of the provisions will be extended, some of them will but not until Congress gets back to work after the election.

And then we’ll have to wait while they argue and point fingers before seeing any new laws. Once we have new tax provisions, the IRS needs to work them into the tax returns, create instructions and worksheets, distribute that info to tax software companies and print new forms. The longer Congress takes to deal with the expiring provisions, the less likely tax season will start on time.

We’ve had this problem before. In 2009, the expiring tax provisions were not extended until December. There were 2009 tax year returns which couldn’t be filed until February 15, 2010 because the IRS needed time to implement changes.

Delaying the start of the tax season, even for part of the tax returns, impacts on clients needing their refund and preparers who need early season income. The biggest problem right now is that we can’t do much tax planning. Tax rates, the amount of credits, Alternative Minimum Tax, the estate tax, bonus depreciation and many more tax provisions are up in the air. That makes it very hard to advise clients.

We’ll see what happens next month. Will we be able to file in 98 days or will the start of the tax season be delayed?

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Livestock Deferment Extended

Attention farmers: if you have deferred the gain on livestock sales because of the recent drought conditions, the IRS has extended the replacement period due to the continuing drought.

When a farmer or rancher has to sell more livestock than usual because of drought conditions they can elect to defer reporting the gain on the extra sales for up to 4 years. The livestock has to be held for breeding, draft or dairy purposes. Poultry and animals raised for slaughter or sporting purposes are not eligible for the deferment. The extra livestock need to be replaced within the 4 years also. However, when the drought continues, as it has this year, the IRS has the ability to extend the replacement period. Which they are doing now.

Farmers and ranchers whose farm is in a county, parish, city or district which has been listed as suffering drought conditions by the National Drought Mitigation Center from September 1, 2011 to August 31, 2012 are eligible for the extra year. This covers all or part of 43 states. A farm can also qualify if they are next to a county that does qualify. So, farmers and ranchers whose sale replacement period was set to expire on December 31, 2012 will get another year. Generally, these are drought sales which took place in 2008 but may also be available for some sales before 2008.

Info about drought sales can be found in Publication 225.

IR-2012-72

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Stoning Glass Houses - Again

This is a post I wrote last year. Based on Gov. Romney’s recent remarks, I thought it should be brought back.

Talk about tax reform is everywhere. "Taxes aren't fair!" and "need to go". And key to the arguments of the Tea Party, other reformers and pot stirrers everywhere is the Tax Policy Center's report that in 2011, about 47% of all taxpayers paid no Federal income tax. That has a lot of taxpayers mad because what they heard and has been repeated is that 47% didn't pay Federal income any tax. And in order to fuel the anti-tax fire and win elections, the anger has been shifted from the tax code to pointing fingers at classes and types of people. "He didn't pay any taxes!" That's not fair! Get a rope! "Those People" should be stoned!

Before you throw anything, I have a question. Do you really know who you are stoning?

Are you sure that you aren't in that 47%? Do you really know what tax you paid and not just what your refund or balance due was? Before you start hollering about the tax credits "those people" used to pay no tax, check your return. Did you take advantage of those credits too? How much would you be paying in tax without that credit? Are you living in a glass tax house?

So now you're sure that you really did pay some federal income tax, but before you pick up that stone to throw at those awful people who paid no taxes, I would suggest you check your target. You could be aiming at your children or grandchildren or parent. There is that nice young man who picks up your trash, or the teacher's aide in your son's classe, or your favorite greeter at Wal-Mart. It could also be your boss or the owner of a business. If you want to take out your tax frustrations on the 47%, it's only fair to include everyone who benefited not just the ones you don't like.

Look at the facts. That Tax Policy Center report covered Federal income tax only. That 47% still paid into Social Security and Medicare, paid sales taxes, local property taxes and in most cases paid state income taxes. And the report found taxpayers in every income level and filing status who didn't pay any Federal income tax. Most of those taxpayers simply took advantage of current tax laws and legally paid no tax.

We need Federal tax reform. What we don't need to do is target taxpayers who are taking advantage of deductions and credits we don't qualify for. Let's face it; if you could qualify you would be using those same credits and deductions. Put your frustration and anger to solving the tax code problem and not throwing stones.

FYI-The link to the Tax Policy Center includes a nice pie chart that breaks down the credits and deductions being used to reduce taxes for the 47%.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.