Tax Filing Season Starts January 30th – A late start due to late law passage
When Washington makes retroactive law changes in the 11th hour, it causes havoc on the thousands of those who must create tax forms, modify instructions, update tax software and get all the programs ready to prepare taxes. The IRS has let us know their timeline for tax return readiness. Here is what you need to know.
“We have worked hard to open tax season as soon as possible.”
– Acting IRS Commissioner Steven T. Miller
The IRS recently announced that it is targeting January 30th as the first day it will begin processing 2012 tax returns. This delay in filing is due to the late passage of the Tax Relief Act during the first week of January. Here is what you need to know.
Paper or Plastic (digital). It makes no difference if you e-file or send in a paper tax return. Both processes will begin on January 30th.
Don’t Wait. A number of tax returns will not be allowed to process until late February or early March. Because of this, procrastinators could pay a heavy price in getting their returns processed and refunds paid versus other tax years. So get your information in as soon as possible.
Software Updates too. Just because the IRS says they anticipate processing tax returns on January 30th does not mean all returns will be processed on that date. The software vendors must also update their programs AFTER the IRS provides revised specs for their tax forms.
Some Returns will need to wait. A number of tax returns will not be filed until late February or early March. This includes tax returns that have the following:
- Residential Energy Credits
- Qualified Adoption Expenses
- Depreciation of Property
- General Business Credits
- Domestic Production Activity Deductions (DPAD)
Remember, just because the processing of your tax return may be delayed does not mean you should delay the preparation of your return. Send in your tax information as soon as possible. Having your tax return ready when the processing window is open will help ensure the timely filing of your return and the receipt of any potential refunds.
Hot! 2012 Charitable Contributions from Retirement Accounts – You have until the end of January, 2013 to act
When the recent tax legislation was passed one of the provisions that retroactively goes back to 2012 had no window of opportunity to take advantage of the tax break. The signed legislation provides a small window to make an adjustment to your 2012 charitable contributions if you are over 70 1/2 years old. This is what you need to know.
Looking for a way to reduce your 2012 income? Those who are older than 70 1/2 have an opportunity to make charitable contributions from their qualified individual retirement accounts and have it excluded from 2012 income. Here is what you need to know.
In Section 209 of the recently passed tax legislation there is a provision for qualified seniors to make a direct charitable contribution out of their qualified retirement account and have it count for 2012. The requirements are;
- You must be 70 ½ years old or older.
- You may only make the contribution from a qualified individual retirement account.
- You may treat any qualified charitable distribution made after Dec. 31, 2012 and before Feb. 1, 2013 as deemed to have been made on December 31, 2012.
- If you made a qualified distribution from an individual retirement account in December 2012, the amount is then transferred in cash to a qualified charitable organization prior to February 1, 2013 AND the distribution would meet the other direct contribution requirements you may exclude the distribution from your income.
Other things to know
- There is a small window. If you want to take advantage of this 2012 tax opportunity you must do so by the end of January, 2013.
- There is a limit. Remember this direct charitable contribution is limited to $100,000.
- It must be done correctly. Talk to your plan’s trustee to ensure your contribution is handled correctly.
- What is the benefit? Instead of receiving an itemized deduction for your contribution, qualified direct contributions from your retirement account do not have to be claimed as income. This effectively allows you to receive 100% of the donation as an un-taxable event.
Please recall that this direct charitable contribution for seniors from their qualified retirement account originally expired in 2011. The direct contribution benefit is now extended through 2013.
2012 Tax Laws Finalized….. IN 2013! – Here is the late breaking news
In a late night session, Washington D.C. put the finishing touches on a tax bill that addresses pre-scheduled 2013 tax changes. Included in the legislation are some provisions that impact 2012.
During the wee hours of January 1, 2013 the final touches were made to 2012 tax laws. While the rest of us could not realistically make plans during 2012 for laws passed in 2013, perhaps there is a clause or two that may help you when you file your taxes in the next few months. Here is what you need to know:
- Alternative Minimum Tax (AMT). The recently passed tax package includes both a patch for the AMT and a permanent fix to keep the AMT from impacting 20 million plus more taxpayers.
Impact: If you paid AMT in 2011 you will probably pay it once again. If not, you probably won’t …unless your income or deductions change significantly.
- Educators Expense Deduction is back. You may once again deduct up to $250 in out-of-pocket expenses if you are a qualified teacher. This provision also applies to 2013.
Impact: Hopefully you kept track of your out-of-pocket classroom expenses. If not, start digging through your receipts.
- Tuition and Fees Deduction is back. This too was extended from 2011 to 2013.
Impact: One more educational deduction option to consider in addition to the Lifetime Learning Credit, the American Opportunity Credit, Coverdell Savings, 529 plans and more.
- Charitable Contributions from seniors’ qualified retirement plans. This too, expired in 2011 and has been extended through 2013.
Impact: Good luck with this one for 2012 as the change is made after the year ended. Use this as a planning tool for your 2013 donations.
- Itemized Deduction Code Extensions. The optional general sales tax deduction instead of state income tax itemized deduction was extended through 2013. So too is the ability to treat qualified mortgage insurance premiums like qualified interest.
Impact: This should help maximize your itemized deductions. If you made any large purchases during 2012 that paid sales tax you may wish to collect the receipts.
Stay tuned, many more changes were made to tax laws that will impact you in 2013. The changes noted here will have the greatest impact on your 2012 tax liability.
Check Your Pay. Social Security Changes are Here! – Know your new take-home pay
The temporary tax cut in Social Security expires at the end of the year. What will
your employer do? You had better check.
When you receive your initial paycheck for 2013 you had better take a close look to see what the payroll department has done with your pay. If you do not, you may be in for a big tax bite at the end of the year.
Background
For years the Social Security tax was set at 12.4% of your earnings. 6.2% of the obligation was paid by your employer. The other 6.2% was paid by you, the employee. The tax was applied to a maximum of $110,100 of 2012 earned income for each employee. Despite the long-standing discussion regarding the impending insolvency of Social Security, Washington passed a 2% tax cut for 2011 and 2012 on the employee portion of this tax (from 6.2% to 4.2%). This provision expires beginning January 1, 2013 unless Congress acts to extend the 2% tax cut.
What you should do
- Check your pay. Make sure that your Social Security withholding is returned to 6.2%. If it has not been done, notify your payroll department immediately.
- Note the pay drop. Understand the impact of the return to historic Social Security tax rates on your income. Adjust your household spending to plan for this drop in your take-home pay.
- While you’re at it. While reviewing your initial 2013 pay stub for the Social Security adjustment, also review all your other withholdings. Many employers adjust other benefit costs at the beginning of each year. This includes retirement savings plans, employer retirement match programs, health insurance, dental insurance, and life/disability.
- Adjust your withholdings? Also check your state and federal withholdings to ensure they are accurate. If adjustments are required file a new W-4 with your employer.
- Self-employed too. The 2.0% re-set in Social Security rates also impacts self-employed individuals. Make sure you plan accordingly.
As a final note, please stay tuned. Our elected officials in Washington D.C. are full of surprises and may change Social Security tax rates once again.
Identity Fraud Epidemic Hits the IRS – Are your records safe?
Identity theft has found a new target in a big way….they’re trying to get your withholdings. Stealing your federal funds is often a lower risk theft than making money selling drugs or using traditional theft. Here is what you need to know.
The IRS estimates that it paid out over $2 billion in fraudulent claims for refunds. While the age of e-filing and automatic deposits has sped up receiving our refunds, it has also created a tremendous identity theft problem. Thankfully, the IRS is now paying attention to this problem and is actively using their data matching programs to help catch identity thieves trying to steal your withholdings.
So why think about the problem now? The key to success for these thieves is early submission of a false tax return to get at your withholdings before you do. By increasing awareness you have a better chance of catching the theft before it takes place.
Here are early warning signs that you may be targeted for this type of identify theft.
- You receive mail with someone else’s name on it from one of your service providers (like a health insurance statement).
- You receive notice from the IRS that they are holding up your refund (when you have not yet filed your tax return).
- You are turned down for a loan though your credit should be good.
- You see strange cars or people wandering by your home or mailbox.
To steal your withholdings, these thieves need your name, Social Security number, birth-date, address and other basic information. Here are some tips to ensure your information is not readily stolen:
- Health insurance records. Doctors and dentists often use your Social Security number as a patient identifier. Do not use this number when filing out forms at the doctor’s or dentist’s office.
- Your health insurance. Another vendor that uses your Social Security number is your health and dental insurance company. Make sure their identification card DOES NOT display your Social Security number. If it does, ask to have a generic number created for your account.
- Check your statements. Any statements mailed to you should not display entire account numbers. The Social Security Administration has finally masked Social Security numbers on their written correspondence.
- Fix your bank. The Social Security statements now only show the last four digits of your Social Security number. Unfortunately, most banks use the last four digits of your Social Security number to confirm your identity. That makes it pretty easy to access your confidential credit card and other banking information. To solve this problem ask your bank to use an alternate means to confirm your identity.
- Go digital. Mailbox theft is a common way thieves get your refund or account information. By signing up for digital statements and automatic deposit, it reduces the risk of theft from your mailbox. Unfortunately, it means you need to consider your digital security as well.
- Never give it away. Never give your Social Security number or other personal information to someone over the phone or via email. The IRS does not use these means solicit confidential information.
For more information visit the Federal Trade Commission web site: www.ftc.gov/bcp/edu/microsites/idtheft
You Can’t Deduct that Loss. It’s a Hobby. – How to ensure your business is not
The old and fast rules to determine whether your business activity is deemed a hobby in the eyes of the IRS have been replaced by guidelines. Here is what you need to know as you wrap up your business year.
You’ve loved dogs all your life so you decide to breed them and start a dog training business. Is this a business in the eyes of the IRS or a hobby? Knowing what the IRS is looking for and properly positioning your small business can save taxes and headaches if you are ever questioned by the IRS.
Why should you care?
If your activity is a business your income can be reduced by all your qualified business expenses even if it results in a loss. If your activity is a deemed a hobby, no losses are allowed on your tax return. Furthermore, your hobby expenses are treated as miscellaneous itemized deductions and do not count until they (and other miscellaneous expenses) surpass 2% of your income.
Tips to make it a clear business
Here are some simple tips to ensure full deductibility of your expenses against your business income.
- Profit motive. You must show that you intend to make a profit with your activity. The old rule of thumb was to show a profit at least three out of the past five consecutive years to safely qualify your activity as a small business. But this is no longer the case. Although more difficult to substantiate, you can show profit motive without ever showing a profit by your ongoing activities around the business.
- Active participation. You need to be actively involved in your pursuit for success. If you simply invest money in the dog business, but are never there to care for them or give lessons, you will have a hard time justifying the business nature of the activity.
- Be professional. Businesses have separate checkbooks, business cards and stationery. They have financial statements and show the same disciplines one would find in a “for profit” venture of the same type of activity you are pursuing.
- Pleasure factor management. If your business has a large enjoyment factor, you will need to be even more cautious about having proper records. Ideally the pleasure factor is secondary to running your business. If you claim to be a golf pro giving lessons, but then spend all your time playing golf, you will have a hard time justifying the activity as a true business.
- Have multiple customers. If you only have one or two customers, who also happen to be relatives, your activity may be deemed a hobby. Having a number of customers, even without profits, can make all the difference in allowing for expense deductions.
- Showing profit motive without profits – Part II. How else can you show profit motive when no profit is to be found? Advertising is one way to do this. Keep copies of all ads trying to drum up business. Keep a daily diary of business activities, noting who you meet and for what purpose. Create and keep sample product, even if it is not yet sold.
- Understand your risk. There are certain business types that are under the IRS microscope when it comes to hobbies. Key among these are multi-level marketing businesses like Amway, Tupperware and Avon. It also includes the thousands of part-time sellers of goods on internet sites like e-bay. If you are in one of these business activities you will need to prove the business nature of your involvement and be prepared to be challenged.
Quick Checklist
Wondering if your business activity may be considered a hobby? Review this checklist. The more yes answers, the better your chances of defending your position.
- Conducted activity in business-like manner?
- Have expertise in your activity?
- Put time and effort into the activity?
- History of income/profits?
- Have had prior success in a similar activity?
- Is there a low element of pleasure/recreation involved?
- Are there appreciating assets or an expectation that there will be?
Remember, having a business activity reclassified as a hobby can mean a big tax bite at tax time. But by keeping proper records and pro-actively knowing the pitfalls, you can avoid most problems.
No Check! Where’s Your Proof? – What to do about your need for documentation
Very few banks return your cancelled checks. So what do you need to do if required by the IRS to prove your deductions? Often this means staying ahead of the game at year-end.
Year-end is a good time to ensure you have proper documentation to substantiate your tax deductions. This is important as many banks start deleting online documentation that is over one year old.
Background
Two things have happened over the past ten years that have greatly reduced the ability to have a canceled check as proof when the auditor comes calling. The first is the advent of online bill paying services. The second is a regulation that was passed in 2003 commonly known as Check 21. With online bill paying, you pay a bill via an online banking service. Your only receipt is often just an entry in your checking account. With Check 21, the law allows banks to digitally capture the check and then destroy the paper copy without returning it to you. So what do you do if you need proof that you paid for a tax deductible item?
Some Tips
- Know your bank. Understand what your bank keeps and for how long. This includes digital statements and digital copies of checks (both front and back). Understand if there are any fees charged if you need to request copies of payments.
- Retain copies of all bank statements. Review your records to ensure you have copies of all monthly bank statements. This is often the starting point for an IRS agent that wants proof of payment, so it should be yours as well. These copies may be in either paper or digital format. Download online copies of your statements and place them in a password protected file.
- Collect copies of tax related proof of payment. Go through your statements and mark the payments that will, in all likelihood, be used as a tax deduction. Make sure you have copies of the front and back of each of these payments. If you do this work now, the copies are often still available online for no fee. Even online bill payments often have a digital copy that can be used.
- Get independent acknowledgements. If you have larger payments you should also make sure you have independent acknowledgement from the merchant or organization to substantiate the deduction. This is true for charitable contributions of $250 or more, and any business or medical expenses.
While having the traditional “proof” of an expenditure is now harder to come by, the IRS understands that approved technologies are changing the type of substantiation available for them to review. By being on top of this documentation at the end of each year, you can save yourself a lot of headaches should you ever need to prove your deductions.
Lower Your Taxes THIS YEAR! – Here are 6 ideas that most people can use
As Congress debates tax law changes, and we watch the give and take like its a bad soap opera the clock keeps ticking towards the end of the tax year. So what can you do? Here are some time tested tax reduction ideas.
While 2012 winds down, there is still time to reduce your tax burden. Here are six ideas that can save money for most of us.
- Pre-tax Savings. Take advantage of opportunities to set aside income on a pre-tax basis. This includes participation in company sponsored retirement savings programs, Health Savings Accounts (HSA), and “Flex Benefits” accounts that allow using pre-tax earnings to pay for childcare and out-of-pocket medical costs. Remember, however, unlike HSAs it is important to use up any funds in your Flex health care accounts and dependent care accounts prior to the end of the plan year as any unused funds will be forfeited.
- Defer Income and Accelerate Deductions (or vice versa!). When possible think about whether it is better to reduce taxable income in this year or next year. By understanding which tax year will be more advantageous to you, you can act to defer income into a subsequent tax year and accelerate deductible expenses into the current tax year. On the other hand you may believe tax rates will be higher next year. If this is the case you will want to move as much income into the current year and defer expenses.Here are some ideas if your strategy is to minimize taxable income this year:
- Delay receipt of a bonus check
- Make an extra house payment
- Make extra charitable contributions (that you would make anyway)
- Make next year’s church donations this year.
- Make extra trips to donate non-cash items prior to January 1st
- Review your investments to book gains and/or losses
- Make Interest Expense Deductible. Move non-deductible interest expenses (personal credit cards) to deductible interest expense (home equity loans).
- Maximize tax-exempt and tax-deferred Investments. The higher your tax bracket the more tax savings you’ll realize with tax exempt and tax deferred contributions such as employer sponsored 401(k)s, IRA’s, tax-free municipal bonds, and Section 529 College Savings Plans.
- Navigate Estate Planning. Manage the value of your estate to minimize estate taxes through gifting, trusts, life insurance, annuities, and other estate planning tools.
- Avoid Penalties. Avoid costly penalties and interest charges by filing your returns and paying taxes owed on a timely basis, as required by the IRS.
Plus a bonus thought. Look for ways to double dip the tax savings. One of the best examples of this is the donation of appreciated stock (held over one year) to a charitable organization. Not only do you get to deduct the appreciated value of the stock, you also avoid paying capital gains tax on the increased value of the shares.
New Mileage Rates for 2013
The IRS announces mileage rates for 2013. These rates may be used in place of tracking actual auto expenses for qualified travel.
The IRS recently announced mileage rates to be used for travel in 2013. The Business, Medical, and Moving mileage rates increase one cent versus 2012. Unfortunately, the rate to be used for Charitable travel is unchanged because updates in this area require Congressional action. Remember to create and keep a detailed log of your applicable mileage for your qualified business, medical, moving and charitable driving. Without this documentation, your qualified deduction could be disallowed.
2013 New Mileage Rates
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Here are 2012 rates for your reference as well.
2012 Mileage Rates
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Government Shutdown Impacts Return Processing – …but only a little
Think the 16 day closure of the Federal Government is going to delay the tax season? Yes, but only a little. The Government announced it will open the 2013 tax filing season on January 31st. Only one week later than anticipated.
“Our teams have been working hard throughout the fall to prepare for the upcoming tax season. The late January opening gives us enough time to get things right with our programming, testing and systems validation…”
-IRS Acting Commissioner Danny Werfel
Many anticipated that the Federal Government closure in October would dramatically impact the start of processing tax returns. It will, but only by approximately one week according to a recent announcement from the IRS. Here is what you need to know.
Return Processing Begins: January 31, 2014 (originally scheduled for 1/21/2014). This is one day later than last year. This processing date applies to both e-filed and paper tax returns.
Don’t wait: Tax returns can be prepared and will remain in queue until they can be processed. That means, like last year there will be a bottleneck of tax returns when the IRS starts processing them on the 31st. So if you expect a refund, do not procrastinate to gather your materials. Have your prepared tax return ready to go prior to the 31st.
No missing forms. Last year a number of tax returns using select forms could not be filed immediately. This included certain business tax returns and tax returns using the Adoption Credit. These limitations do not exist this year.
Still April 15th. Despite the fact that the IRS was not working during the government shutdown, the tax due date of April 15th remains unchanged.
Remember, just because the processing of your tax return may be delayed does not mean you should delay the preparation of your return. Send in your tax information as soon as possible. Having your tax return ready when the processing window opens will help ensure the timely filing of your return and help speed up the receipt of any potential refund.