Archive for December, 2010

2011 Tax Benefit Inflation Adjustments

Thursday, December 23rd, 2010

Tax year 2010 will end in just a few days and with that event many tax planning opportunities will also have ended.  With the passing of this milestone there will concurrently begin new opportunities to reduce your tax liability for 2011.  According to the Federal Reserve “inflation” has been near zero for the past 18-24 months.  Additonally, economists are making their own predictions as to when we might expect “inflation” to begin to rise again.  Their estimates range from Q3 of 2011 through Q1 of 2013. 

The IRS has recently issued its guidance for 2011 for those tax law benefits that are “indexed” (adjusted) for inflation.  The eight categories include:

1.  Personal and dependent exemption

2.  Standard deduction

3.  Additional standard deduction for blind people and senior citizens

4.  Tax bracket thresholds for all tax filers

5.  Maximum earned income for the Earned Income Tax Credit (EITC) for low and moderate income filers

6.  Modified Adjusted Gross Income (MAGI) for the phase out of the Lifelong Learning Tax Credit

7.  Monthly limit on the value of qualified transportation benefits (parking, transit passes, etc)

8.  Interest and income phase out limits for education loans

Additional information from the IRS is contained below, including a link to the specific provisions to Revenue Procedure 2011-12:

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Extended Tax Laws Require Delays in 2010 Tax Return Filing

Thursday, December 23rd, 2010

In several specific situations many taxpayers are anxious to file their annual tax returns.  This is especially true if you are due to receive a large tax refund or need the filed tax return to support a legal proceeding (i.e. a divorce settlement, pending litigation, etc) or in conjunction with a mortgage loan application. 1099s and W-2 s are required to be provided to recipients by the end of January or early February.  However, President Obama did not sign the tax law “extenders” until December 17th.  As you may have already concluded, it is not possible to incorporate all of these changes in to the IRS system, tax software etc to meet the normal end of January submissions.

If your 2010 tax return includes any of the following, you should not file your return (either via e-file or paper) until late February:

1.  State and local sales tax deduction, or

2.  Higher education, tuition and fees deduction, or

 3.  Educator (teacher) expense deduction, or

4.  You itemize your deductions using Schedule A

Additional updates and information will be available from the IRS website at http://www.irs.gov  You may also discuss these matters with your CPA, tax return preparer, or tax software vendor.  Specific guidance from the IRS is contained below:

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Tax Hike Prevention Act of 2010

Friday, December 17th, 2010

Today President Obama signed the “Tax Prevention Act of 2010″ which provides the framework for the income taxation regulations for tax years 2011-2012.  CNN Money (http://cnnmoney.com) has provided an excellent encapsulated summary of the key provisions.  The unedited information from that website is provided below:

“Tax cut deal: How it affects you

Now that Congress has passed the Tax Hike Prevention Act of 2010, it will be sent to President Obama for his signature. And taxpayers will have some certainty about their tax situation, if only for the next 24 months.

The bill contains a bevy of tax breaks — new and extended — and emergency help for the jobless. Its cost over 10 years is estimated at $858 billion.

Here’s a rundown of some of the biggest ticket items that will affect individuals. (Except where noted, all provisions are for 2011 and 2012).

Extended income tax rates: $207.5 billion The six federal income tax rates will remain at the same levels they are today: 10%, 15%, 25%, 28%, 33% and 35%. In addition, itemized deductions will continue to be allowed in full for high-income taxpayers.

AMT fix: $137 billion More than 20 million tax filers will be protected from having to pay the so-called “wealth tax,” otherwise known as the Alternative Minimum Tax.

For tax year 2010, the bill will raise the amount of income that is exempt from the reach of the AMT to $47,450 for individuals and to $72,450 for couples filing jointly. In 2011, those exemption amounts will increase to $48,450 and $74,450 respectively.

In addition, the bill will allow taxpayers to apply nonrefundable credits (which reduce one’s tax bill dollar for dollar) to their tax liability — whether under the AMT or the regular tax code.

Social Security tax break: $112 billion Workers will get a 2 percentage-point break on their payroll tax for one year. Instead of paying 6.2% on wages up to $106,800, they will only have to pay 4.2% in 2011.

This tax break replaces the Making Work Pay credit, which expires this year.

Unlike Making Work Pay, which was limited to workers making less than $75,000 ($150,000 for couples), the payroll tax holiday will be available to everyone who pays into Social Security.

Expanded child tax credit: $90 billion The bill will retain the $1,000 child tax credit (up from $500 before the Bush tax cuts). It also will retain the reduced-earnings threshold, which allows more people to claim the credit as refundable.

A refundable tax credit is one paid to a tax filer even if the value of the credit exceeds his tax liability. So if a filer doesn’t owe any federal income tax but qualifies for the credit, it is paid to him in the form of a refund.

Smaller estate tax: $68 billion Barring any changes, the estate tax in 2011 and 2012 will be reinstated at an exemption level of $1 million and a top rate of 55%. But under the bill, the exemption level will be raised to $5 million and the top rate lowered to 35%.

The legislation will also reinstate the so-called “step up in basis” for beneficiaries of those who die in 2010, 2011 or 2012. A stepped-up basis means that when someone sells an inherited asset, his capital gains tax bill will be based on the asset’s price the day he inherited it, rather than when the decedent originally bought it.

Practically speaking that means the beneficiaries of those who died in 2010 will be allowed to choose which estate tax rules to follow — those of 2011 or those of 2010. Under 2010 rules, there is no estate tax but also no step-up rules; there is only an option to exempt $1.3 million worth of capital gains from tax.

Help for the jobless: $57 billion The unemployed will get a 13-month extension of the deadline to file for additional unemployment benefits — which go as high as 99 weeks in states hit hardest by job loss.

Extended investment tax rates: $53 billion Everybody will get to keep their low investment tax rates for the next two years. For most people, that means their qualified capital gains and dividends will continue to be taxed at 15%.

Low-income tax filers (those in the 10% and 15% brackets), however, will continue to enjoy a 0% tax rate on their capital gains or dividends.

Marriage penalty relief: $27 billion Marriage will still be hard (sorry), but not because less-than-wealthy two-earner couples will owe more to the IRS than they did when they were single.

The bill continues to ensure that the standard deduction for couples is exactly twice that for single filers. It also maintains an expanded 15% tax bracket so that the amount of income in that bracket for joint filers is exactly double that for single filers.

Expanded college credit: $18 billion Paying for college tuition in 2011 and 2012 will be made a bit easier with the retention of the American Opportunity tax credit, which is an expansion of the HOPE tax credit.

The Opportunity credit is worth up to $2,500 (up to 100% of the first $2,000 spent and up to 25% of the next $2,500), and it may be claimed for four years’ worth of college. Eligibility to take the credit is limited to those with modified adjusted gross income below $90,000 ($180,000 for couples filing jointly).

Individual tax break extensions: Costs vary The legislation will extend a number of tax breaks that have been introduced in the past few years such as the option to deduct on one’s federal return state and local sales tax instead of state and local income tax — at a cost of $6 billion. Also, it will extend a deduction for qualified tuition and other education-related expenses at a cost of $1.2 billion.

Less pricey extensions include a break for teachers to deduct up to $250 in classroom expenses (just under $400 million).”

2011 Standard Mileage Rates

Friday, December 3rd, 2010

Taxpayers are allowed to deduct the “ordinary” and “necessary” expenses which are incurred throughout the year in conjunction with the operation of a trade or business. Individual taxpayers can deduct certain vehicle operating costs for self-employment activities, transportation to/from medical facilities related to obtaining medical care (services), moving purposes (if certain tests are satisfied), and in conjunction with donations of time and/or services to qualified charitable organizations.  No deduction is allowed for any portion of the cost of operating an automobile attributable to personal use.

 Self-employed and individual taxpayers have the option to 1) maintain and keep detailed records of actual automobile expenses or 2) utilize the standard per mile rates promulgated by the Internal Revenue Service.  The applicable standard mileage rate for charitable, medical, or moving expense miles is in lieu of all operating expenses (including gasoline and oil) of the automobile. The costs for  depreciation or lease payments, insurance, and license and registration fees are not deductible, and are not included in the charitable or medical and moving standard mileage rates. These costs are included in the business mile rate. Taxpayers may separately deduct parking fees and tolls attributable to the use of the automobile for charitable, medical, or moving expense purposes.

 The IRS has recently published the standard mileage rates for 2011 that are applicable to 1) business miles driven, 2) miles driven for medical and moving expense deductions, and 3) miles driven in support and services that are provided to charitable organizations: (more…)

New Electronic Filing Requirements for 2011

Friday, December 3rd, 2010

E-filing is an accurate, extremely efficient method for all taxpayers to file their tax returns.  Additionally, tax refunds (if you are to receive one) are generally available in your bank account 7-12 days earlier compared to “paper filing.”  As stated in the article below ” IRS e-file benefits taxpayers and tax return preparers. For the tax return preparer, it can mean a more efficient, productive business and fewer errors on the tax return. It is safe and secure. For taxpayers, it can mean faster refunds, the ability to file now and pay later and peace of mind that comes with a receipt acknowledgement.” 

If you are already an e-filer your tax return preparer is probably an Electronic Return Originator (ERO).  Depending on the software that he/she uses, the software will perform a diagnostic check (test) of your return before it is submitted to the E-file Provider (ERP).  This is an important step in determining if there are any errors or issues with your tax return.  If there are, they can be corrected immediately prior to submission.  Once a return is submitted to the IRS it can not be retrieved.  An amended tax return is generally the only option that is available to you.  After your tax return is submitted to the ERP additional diagnostic tests are performed.  If there are errors the tax return is sent back to the ERO.  If not, it is transmitted to the “taxing authority” (the IRS).  At the time of receipt the taxing authority performs additional tests to determine if there are errors, omissions, etc.  If there are issues, the return is sent back to the ERO for correction and re-submission. If correct, the return is immediately processed by the IRS.

In 2011 EROs who file 100 or more tax returns will be required to e-file for their clients.  In 2012 that threshhold drops to 11 tax returns. 

An additional point should be emphasized.  The IRS has taken a leadership role in capitalizing upon the myriad of benefits that are available by leveraging the advantages of information technology.  In most cases the IRS  already has the information regarding your income and most of your tax deductions before you file your tax return.   Therefore, accuracy and completeness are of paramount importance in the preparation and submission of your tax return.  Additional comments from the IRS follow:  (more…)