Wisconsin residents who use health savings accounts or who have children in day care will be able to take advantage of new tax breaks as they fill out their 2011 income tax returns this year. Companies that create jobs in Wisconsin also are in line for new benefits.
"One of the most important things to a lot of people is health savings accounts," said Wisconsin Department of Revenue secretary Richard Chandler.
The special accounts, set aside to cover medical expenses, have qualified for federal tax deductions but 2011 is the first year the state of Wisconsin is following suit.
People who have health insurance with high deductibles or who don't have health insurance are often those who use health savings accounts, said Mark Boebel, a partner in SVA Certified Public Accountants' tax services group, Madison.
"They are a way to put away money for medical expenses that aren't covered by insurance," he said. Boebel said the new benefit could provide up to $6,000 in additional tax deductions.
A bigger chunk of the cost of health care premiums will qualify for a state tax deduction.
In 2010, unemployed workers or workers whose employers did not pay any insurance costs could deduct 66.7 percent of their own expenses. For 2011, that deduction is 100 percent.
"You have quite a few people that are unemployed. If they're paying $10,000 (a year) for health care premiums to cover their family, an additional $3,300 of deductions would result in tax savings of anywhere from $150 to $200 over 2010," Boebel said.
Workers whose employers pay part of the cost of health insurance premiums will be able to deduct 25 percent of their 2011 expense, up from 10 percent the previous year.
For the first time, Wisconsin residents who pay for day care for their children will get a state tax break to go along with the longtime federal tax break.
"Starting in 2011, they're allowing up to a $750 deduction for one child and a $1,500 deduction if you have two or more children," Boebel said. He said those who qualify for the $1,500 could save about $125 in taxes.
The state child care deduction is on top of the state child tax credit, and the deduction will increase in the next few years, to as much as $3,000 for one child or $6,000 for more than one dependent in 2014.
Businesses that create jobs in Wisconsin may qualify for new tax credits:
• A business that moved to Wisconsin in 2011 pays no corporate income taxes for two years.
• Companies that create more jobs can receive a tax deduction of up to $4,000 per position.
• Certain types of companies that boost research spending can get a bigger tax credit for those costs, as much as five to six times more, said Kimberly Anderson, tax partner with CliftonLarsonAllen, Middleton.
A company that qualified for a $5,000 research and development tax credit in 2010 could get as much as a $30,000 tax credit, if its R&D costs increased enough, Anderson said.
"There are still a lot of companies out there that are not taking advantage of this," she said.
Investors or business owners who have long-term capital gains may be able to delay paying taxes on those gains if they pump their entire investment, including the gains, into another qualified Wisconsin business within six months.
That benefit "has to be planned," Boebel said. The money must have been put into a separate account following the sale, so it may be more of a planning tool for 2012 taxes, he said.
Sunday, February 5, 2012
Saturday, February 4, 2012
4 Must-Have Tax Apps
Tax year 2011 may be over, but tax season 2012 is just getting under way. Don’t settle for less this year. There are some really great apps out there that can help you stay organized, even on the go.
1. MileBug – helps you keep track of your mileage, as well as any expenses you might incur along the way. Perfect for deducting business travel! Available in the iTunes App Store for $2.99 and the Android Market for $1.99.
2. XpenseTracker – allows you to keep track of all of your business expenses in one place – including mileage. XpenseTracker allows you to export your expenses to your desktop to load into Excel. If you like to keep track of your business receipts with the camera on your phone, all photo receipts can also be exported to your computer. This all-inclusive app is available in the Apple App Store for the iPhone and iPad and, at only $4.99, is basically a steal.
3. IRS App – If you like going straight to the source with questions about taxes, this is the app for you. It’s compatible with your iPhone, iPod Touch, or iPad, providing you’re running at least iOS 4.2. And only 99¢!
4. Shoeboxed– A receipt tracker and reader that allows you to use your iPhone camera to keep track of all of your purchases. When it comes time to itemize, you’ll be ready to maximize your tax return. This app is available in the Apple App Store for the iPhone and iPad. Best of all? It’s free!
1. MileBug – helps you keep track of your mileage, as well as any expenses you might incur along the way. Perfect for deducting business travel! Available in the iTunes App Store for $2.99 and the Android Market for $1.99.
2. XpenseTracker – allows you to keep track of all of your business expenses in one place – including mileage. XpenseTracker allows you to export your expenses to your desktop to load into Excel. If you like to keep track of your business receipts with the camera on your phone, all photo receipts can also be exported to your computer. This all-inclusive app is available in the Apple App Store for the iPhone and iPad and, at only $4.99, is basically a steal.
3. IRS App – If you like going straight to the source with questions about taxes, this is the app for you. It’s compatible with your iPhone, iPod Touch, or iPad, providing you’re running at least iOS 4.2. And only 99¢!
4. Shoeboxed– A receipt tracker and reader that allows you to use your iPhone camera to keep track of all of your purchases. When it comes time to itemize, you’ll be ready to maximize your tax return. This app is available in the Apple App Store for the iPhone and iPad. Best of all? It’s free!
Friday, February 3, 2012
Choosing Your Income Tax Preparer
New paid preparer regulations which include registration with the IRS, testing by the IRS and continuing education will affect 350,000 paid income tax return preparers beginning in 2012. Previously there were no minimum education requirements, no testing, and no continuing education requirements for someone to prepare income tax returns for a fee.
Effective 1/1/12, individuals preparing income tax returns for compensation must obtain a PTIN (Preparer Tax Identification Number) from the IRS. In order to obtain a PTIN the individual preparing the returns must be an attorney, a certified public accountant, an IRS enrolled agent, or must be someone supervised by one of these professionals. Otherwise the preparer will be required to pass a competency test developed and administered by the IRS and must take continuing education courses annually in order to renew their PTIN with the IRS. If you pay someone to prepare your tax return, the IRS urges you to choose that preparer wisely. Taxpayers are legally responsible for what's on their tax return even if it is prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare your return.
This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their Preparer Tax Identification Numbers (PTINs).
Here are a few points to keep in mind when someone else prepares your return:
• Check the person's qualifications. In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes.
• Check the preparer's history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents.
• Find out about their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers. Under no circumstances should all or part of your refund be directly deposited into a preparer's bank account.
• Ask if they offer electronic filing. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return.
• Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.
• Provide all records and receipts needed to prepare your return. Reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items.
• Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.
• Review the entire return before signing it. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.
• Make sure the preparer signs the form and includes his or her preparer tax identification number (PTIN). A paid preparer must sign the return and include his or her PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.
Thursday, February 2, 2012
Thanks Mitt and Newt: A Dozen Tax Tips for the Rest of Us.
FROM KIPLINGER.COM -
While the punditocracy dives into the details and debates the vices and virtues of Mitt Romney's and Newt Gingrich's 2010 tax returns, we decided to see if we could glean any ideas that might help you with your taxes ... and maybe even save you some money.
We found a gold mine for ordinary folks who'll never need a Swiss bank account or have to file forms like the Form 926 "Return by a U.S. Transferor of Property to a Foreign Corporation" or Schedule M of Form 5471 "Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons" that were attached to Romney's return.
If you think Romney and Gingrich disagree about undocumented immigrants, their tax returns suggest that they're polar opposites when it comes to investing in municipal bonds to earn tax-free interest.
The former speaker's 2010 return shows he earned $10,754 of tax-free interest, compared with $26,655 of the taxable variety. Romney's forms show just $557 of tax-free interest and $3,295,727 of taxable interest income.
Remember, to figure the taxable-equivalent yield of a tax-free bond, divide the tax-free yield by 1 minus your marginal tax rate. Since Gingrich's marginal rate is 35%, a 3.5% tax-free yield is worth the same as a 5.38% taxable yield (3.5/0.65). Romney was hit by the alternative minimum tax in 2010, so his marginal rate was 28%. Avoiding a 28% tax makes a 3.5% tax-free rate equal to a 4.86% taxable yield (3.5/0.72).
When you buy your principal residence, points you pay to get your mortgage are fully deductible on your tax return for the year you close. When it comes to a second home (or a rental property or a refinancing), however, that cost must be amortized over the life of the loan -- 1/30th a year if you have a 30-year mortgage, for example. That can lead to relatively small -- and relatively easy-to-forget -- write offs.
But if you follow Gingrich's example, you won't miss this tax break. His return shows a $19 deduction for a portion of the $2,261 it cost him to refinance the mortgage on a rental property he owns in Whitehall, Wisc. Since the refi was in October, 2010, he got to write off one-fourth of 1/30th of the cost on that year's return.
Anyone planning a substantial charitable gift this year should take a page from Romney's playbook and consider donating appreciated securities rather than cash.
As long as you have owned the asset for more than a year, you get to deduct the full fair market value of the gift, not what you paid for it. (And neither you nor the charity ever has to pay tax on the appreciation that accrued while you owned the stock.)
Romney's 2010 return shows that he and his wife, Ann, donated $1,525,167 in cash and another $1,458,807 in non-cash gifts -- much of it appreciated stock in Domino's Pizza.
Even if you don't itemize deductions, you can write off alimony paid to an ex-spouse ... as long as you also include the ex's Social Security number so the IRS can make sure he or she reports the amount as taxable income. Gingrich’s return shows that he made payments of $19,800 to one recipient in 2010. Since the Social Security number is blacked out on the publicly disclosed form, it’s unclear which of his two ex-wives received the payments.
The tax law allows you to deduct the loss on a stock that becomes worthless, treating it as though you sold it for $0 at the end of the year in which it lost all value. That appears to have happened to at least one of Mitt Romney's investments. His return shows a $63,511 loss on shares in an investment fund that were disposed of for $0.
Congress has created special rules for what it calls "passive activities," a group that includes most investments in real estate and limited partnerships.
Basically losses from such investments can only be deducted against gains from similar activities. There's an exception that allows up to $25,000 of loss from rental real estate to be deducted if you are "actively" involved in the rental.
We don't know if Gingrich is actively involved in the rental in Wisconsin, but even if he was, he would not have been permitted to deduct the $4,646 loss he reported. The $25,000 allowance gradually disappears as adjusted gross income moves between $100,000 and $150,000. With AGI of $3,142,066, Gingrich is out of luck. (He can stockpile the disallowed loss and deduct it when he sells the property.) By the way, the Romneys' return shows that the passive-loss rule blocked the deduction of over $2 million in losses from limited partnerships.
Plenty of politicians have gotten in trouble in the past for failing to pay Social Security taxes for their child-care providers and household help. For 2012, if you pay household help more than $1,800, you are required to file a Schedule H with your return and pay Social Security and Medicare taxes for your employee.
Both Romney and Gingrich included the form and paid the piper for their household help in 2010. Ann Romney reported that she paid four household employees a total of $20,603 in 2010 and paid $3,152 in taxes for them. Gingrich reported that he paid household help $14,774 and paid $2,260 in Social Security and Medicare tax.
The federal income tax is on a pay-as-you-earn system and if you don't pay in enough during the year -- via withholding from paychecks or estimated tax payments -- the IRS will slap on an underpayment penalty. Generally, you avoid the penalty if your payments during the year are at least 90% of what you owe. Gingrich owed an extra $382,734 when he filed his 2010 return, 38% of his tax bill for the year. That triggered an underpayment penalty of $1,543.
The opposite side of the coin from the underpayment penalty is paying in too much doing the year. About 75% of all taxpayers are in this boat, and get tax refunds every spring. We think that's silly -- and we have a calculator to help you match withholding from your paychecks to what you'll owe for the year. Our calculator won't help Romney, though, because he has no wages from which to withhold. He overpays via quarterly estimated tax payments, and, boy, does he overpay! His 2010 return shows that he paid in $1,609,441 more than the $3,009,766 that he owed. He didn't ask for a refund, though. He let the IRS keep the cash as a down payment on his 2011 tax bill.
A special rule allows qualifying self-employed workers to deduct 100% of their medical insurance premiums, even if they don't itemize deductions. That might have helped Romney, who reported that he paid $14,176 in self-employed health insurance premiums in 2010. But he didn't get the tax break. Rather than claim the special deduction, Romney reported the premiums as a medical expense on Schedule A, where a deduction is allowed only to the extent such expenses exceed 7.5% of adjusted gross income. Romney's $14,176 of premiums fell well short of $1,623,488 (7.5% of his AGI).
While the punditocracy dives into the details and debates the vices and virtues of Mitt Romney's and Newt Gingrich's 2010 tax returns, we decided to see if we could glean any ideas that might help you with your taxes ... and maybe even save you some money.
We found a gold mine for ordinary folks who'll never need a Swiss bank account or have to file forms like the Form 926 "Return by a U.S. Transferor of Property to a Foreign Corporation" or Schedule M of Form 5471 "Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons" that were attached to Romney's return.
Don't Forget Tax-free Interest
If you think Romney and Gingrich disagree about undocumented immigrants, their tax returns suggest that they're polar opposites when it comes to investing in municipal bonds to earn tax-free interest.
The former speaker's 2010 return shows he earned $10,754 of tax-free interest, compared with $26,655 of the taxable variety. Romney's forms show just $557 of tax-free interest and $3,295,727 of taxable interest income.
Remember, to figure the taxable-equivalent yield of a tax-free bond, divide the tax-free yield by 1 minus your marginal tax rate. Since Gingrich's marginal rate is 35%, a 3.5% tax-free yield is worth the same as a 5.38% taxable yield (3.5/0.65). Romney was hit by the alternative minimum tax in 2010, so his marginal rate was 28%. Avoiding a 28% tax makes a 3.5% tax-free rate equal to a 4.86% taxable yield (3.5/0.72).
Remember Points on a Second Home
When you buy your principal residence, points you pay to get your mortgage are fully deductible on your tax return for the year you close. When it comes to a second home (or a rental property or a refinancing), however, that cost must be amortized over the life of the loan -- 1/30th a year if you have a 30-year mortgage, for example. That can lead to relatively small -- and relatively easy-to-forget -- write offs.
But if you follow Gingrich's example, you won't miss this tax break. His return shows a $19 deduction for a portion of the $2,261 it cost him to refinance the mortgage on a rental property he owns in Whitehall, Wisc. Since the refi was in October, 2010, he got to write off one-fourth of 1/30th of the cost on that year's return.
Donate Appreciated Assets to Charity
Anyone planning a substantial charitable gift this year should take a page from Romney's playbook and consider donating appreciated securities rather than cash.
As long as you have owned the asset for more than a year, you get to deduct the full fair market value of the gift, not what you paid for it. (And neither you nor the charity ever has to pay tax on the appreciation that accrued while you owned the stock.)
Romney's 2010 return shows that he and his wife, Ann, donated $1,525,167 in cash and another $1,458,807 in non-cash gifts -- much of it appreciated stock in Domino's Pizza.
Write off Alimony Payments
Even if you don't itemize deductions, you can write off alimony paid to an ex-spouse ... as long as you also include the ex's Social Security number so the IRS can make sure he or she reports the amount as taxable income. Gingrich’s return shows that he made payments of $19,800 to one recipient in 2010. Since the Social Security number is blacked out on the publicly disclosed form, it’s unclear which of his two ex-wives received the payments.
Make the Most of Worthless Stock
The tax law allows you to deduct the loss on a stock that becomes worthless, treating it as though you sold it for $0 at the end of the year in which it lost all value. That appears to have happened to at least one of Mitt Romney's investments. His return shows a $63,511 loss on shares in an investment fund that were disposed of for $0.
Beware the Passive Loss Rule
Congress has created special rules for what it calls "passive activities," a group that includes most investments in real estate and limited partnerships.
Basically losses from such investments can only be deducted against gains from similar activities. There's an exception that allows up to $25,000 of loss from rental real estate to be deducted if you are "actively" involved in the rental.
We don't know if Gingrich is actively involved in the rental in Wisconsin, but even if he was, he would not have been permitted to deduct the $4,646 loss he reported. The $25,000 allowance gradually disappears as adjusted gross income moves between $100,000 and $150,000. With AGI of $3,142,066, Gingrich is out of luck. (He can stockpile the disallowed loss and deduct it when he sells the property.) By the way, the Romneys' return shows that the passive-loss rule blocked the deduction of over $2 million in losses from limited partnerships.
Pay the Nanny Tax
Plenty of politicians have gotten in trouble in the past for failing to pay Social Security taxes for their child-care providers and household help. For 2012, if you pay household help more than $1,800, you are required to file a Schedule H with your return and pay Social Security and Medicare taxes for your employee.
Both Romney and Gingrich included the form and paid the piper for their household help in 2010. Ann Romney reported that she paid four household employees a total of $20,603 in 2010 and paid $3,152 in taxes for them. Gingrich reported that he paid household help $14,774 and paid $2,260 in Social Security and Medicare tax.
Avoid the Underpayment Penalty
The federal income tax is on a pay-as-you-earn system and if you don't pay in enough during the year -- via withholding from paychecks or estimated tax payments -- the IRS will slap on an underpayment penalty. Generally, you avoid the penalty if your payments during the year are at least 90% of what you owe. Gingrich owed an extra $382,734 when he filed his 2010 return, 38% of his tax bill for the year. That triggered an underpayment penalty of $1,543.
Don't Overwithhold
The opposite side of the coin from the underpayment penalty is paying in too much doing the year. About 75% of all taxpayers are in this boat, and get tax refunds every spring. We think that's silly -- and we have a calculator to help you match withholding from your paychecks to what you'll owe for the year. Our calculator won't help Romney, though, because he has no wages from which to withhold. He overpays via quarterly estimated tax payments, and, boy, does he overpay! His 2010 return shows that he paid in $1,609,441 more than the $3,009,766 that he owed. He didn't ask for a refund, though. He let the IRS keep the cash as a down payment on his 2011 tax bill.
Write off Medical Insurance Premiums
A special rule allows qualifying self-employed workers to deduct 100% of their medical insurance premiums, even if they don't itemize deductions. That might have helped Romney, who reported that he paid $14,176 in self-employed health insurance premiums in 2010. But he didn't get the tax break. Rather than claim the special deduction, Romney reported the premiums as a medical expense on Schedule A, where a deduction is allowed only to the extent such expenses exceed 7.5% of adjusted gross income. Romney's $14,176 of premiums fell well short of $1,623,488 (7.5% of his AGI).
Wednesday, February 1, 2012
It’s tax season; here are the filing requirements for seniors.
FROM BRADENTON.COM
What are the 2011 IRS income tax filing requirements for seniors? I had to file and pay federal income taxes last year, but my income dropped and I’m wondering if I’m exempt this year.
-- Recently Retired
According to the Tax Policy Center, 56 percent of retirees will not have to file or pay federal income taxes this year because their incomes are under the IRS filing threshold. Here’s a breakdown of the 2011 filing requirements, along with a few other tips to help you determine if you need to file.
IRS requirements
If your gross income is below the IRS filing limits, you probably won’t have to file a federal tax return this year. Gross income includes all the income you receive that is not exempt from tax, not including Social Security benefits, unless you are married and filing separately. You probably don’t have to file this year if:
You are single and your 2011 gross income was less than $9,500 ($10,950 if you’re 65 or older).
You are married filing jointly and your gross income was under $19,000. If you or your spouse is 65 or older, the limit increases to $20,150. And if you’re both over 65, your income must be under $21,300 to not file.
You are head of household and your gross income was below $12,200 ($13,650 if age 65 or older).
You are married filing separately and your income was less than $3,700.
You are a qualifying widow(er) with a dependent child and your gross income was less than $15,300 ($16,450 if age 65 or older).
Special situations
You also need to be aware that there are some special financial situations that require you to file a return, even if your gross income falls below the IRS filing requirement. For example, if you had net earnings from self-employment in 2011 of $400 or more, or if you owe any special taxes to the IRS such as alternative minimum tax or IRA tax penalties, you’ll probably need to file.
To figure this out, the IRS offers a page on their website called “Do You Need to File a Federal Income Tax Return?” that includes a list of financial situations and a series of questions that will help you determine if you’re required to file, or if you should file (if you’re due a refund). You can access this page at http://www.doyouneed2file.info/, or you can get help over the phone by calling the IRS helpline at 800-829-1040.
Check your state
Even if you’re not required to file a federal tax return this year, it doesn’t necessarily mean you’re also excused from filing state income taxes. Check on that with your state tax agency before concluding you’re entirely in the clear. For links to state and local tax agencies see taxadmin.org – click on “Links.”
What are the 2011 IRS income tax filing requirements for seniors? I had to file and pay federal income taxes last year, but my income dropped and I’m wondering if I’m exempt this year.
-- Recently Retired
According to the Tax Policy Center, 56 percent of retirees will not have to file or pay federal income taxes this year because their incomes are under the IRS filing threshold. Here’s a breakdown of the 2011 filing requirements, along with a few other tips to help you determine if you need to file.
IRS requirements
If your gross income is below the IRS filing limits, you probably won’t have to file a federal tax return this year. Gross income includes all the income you receive that is not exempt from tax, not including Social Security benefits, unless you are married and filing separately. You probably don’t have to file this year if:
You are single and your 2011 gross income was less than $9,500 ($10,950 if you’re 65 or older).
You are married filing jointly and your gross income was under $19,000. If you or your spouse is 65 or older, the limit increases to $20,150. And if you’re both over 65, your income must be under $21,300 to not file.
You are head of household and your gross income was below $12,200 ($13,650 if age 65 or older).
You are married filing separately and your income was less than $3,700.
You are a qualifying widow(er) with a dependent child and your gross income was less than $15,300 ($16,450 if age 65 or older).
Special situations
You also need to be aware that there are some special financial situations that require you to file a return, even if your gross income falls below the IRS filing requirement. For example, if you had net earnings from self-employment in 2011 of $400 or more, or if you owe any special taxes to the IRS such as alternative minimum tax or IRA tax penalties, you’ll probably need to file.
To figure this out, the IRS offers a page on their website called “Do You Need to File a Federal Income Tax Return?” that includes a list of financial situations and a series of questions that will help you determine if you’re required to file, or if you should file (if you’re due a refund). You can access this page at http://www.doyouneed2file.info/, or you can get help over the phone by calling the IRS helpline at 800-829-1040.
Check your state
Even if you’re not required to file a federal tax return this year, it doesn’t necessarily mean you’re also excused from filing state income taxes. Check on that with your state tax agency before concluding you’re entirely in the clear. For links to state and local tax agencies see taxadmin.org – click on “Links.”
Tuesday, January 31, 2012
IRS Increases 1099 Expectations
FROM WEBCPA.COM -
The Internal Revenue Service has increased its forecasts for the number of information-reporting forms it expects to receive this year and in subsequent years as a result of increased reporting requirements.
In a 2010 report, the IRS predicted that it would receive 2.175 billion information and withholding documents from U.S. businesses and individuals in 2012. But in a recently released update to that report, the IRS is now forecasting that it will receive 2.855 billion information reports in 2012, a readjustment of nearly 700 million forms, effectively a 31 percent increase. In its updated projections, the IRS is taking into account new 1099-K reporting requirements for merchants handling credit card transactions, and 1099-B requirements for buyers and sellers of shares who are now required to report information on the cost basis of the stock.
“Companies have had this 1099 reporting responsibility for 25-plus years now,” said Troy Thibodeau, executive vice president at Convey, a developer of software for automating 1099 reporting. “But the last two to three years has seen a significant increase in the amount of third-party reporting that’s taking place.”
For example, companies that process credit card payments on behalf of merchants and businesses are now required to file a 1099-K for all of their credit card proceeds as a result of the Housing Assistance Tax Act of 2008 (see IRS Postpones Credit Card Withholding Requirements).
“The IRS says that reporting alone is going to yield another 50-plus million forms that are going to need to be filed each year,” said Thibodeau.
In addition, the cost basis reporting rules in the Emergency Economic Stabilization Act of 2008 are going to lead to increased 1099-B information reporting (see Cost-Basis Reporting Changes Portend ‘Messy” Tax Season Ahead).
“This year, when you receive your 1099s as a taxpayer, if you sold or traded on stocks, you’re going to get a new 1099-B, which is going to indicate the cost of that stock on the form,” said Thibodeau. “In the past, if you sold stock, you would get a 1099 that said how much in proceeds you received from the sale of that stock, but now whoever sold the stock on your behalf is also going to have to tell you what your cost basis in that stock was. It’s the IRS’s way of determining the gains or losses you received by the sale of that stock. That legislation is going to yield up a lot more 1099 reporting because there’s a bunch of nuanced rules around that saying that if you had made, say, three purchases to accumulate all the stock that you sold, there’s a different cost basis you probably have in each of those purchases, and they have to issue you a 1099-B for every one of those purchases that you then sold. So there’s significantly more 1099-B volume reflected in those projections.”
The increased information reporting requirements are intended to help the IRS reduce its recently expanded estimates for the tax gap between money owed to the IRS and money collected (see Tax Gap Widens to $450 Billion). “The Service has declared that one of the best ways for them to continue to chip away at this tax gap of money owed is through third-party reporting,” said Thibodeau. “If they receive third-party reports of income, then the likelihood that taxpayers are going to report properly goes up significantly and compliance goes up. There’s a lot of additional third-party reporting that the Service and Congress has been looking for, and that will continue to be the case as we move forward.”
Thibodeau thinks that will be the case even though Congress repealed the expanded 1099 information reporting of business-to-business transactions in the Patient Protection and Affordable Care Act of 2010 and the Small Business Jobs Act of 2010 (see Congress Votes to Repeal 1099 Requirements). Despite the outcry over the expanded 1099 reporting requirements in the health care reform law especially, he has seen lawmakers proposing bills with tough new 1099 requirements.
“There’s been other third-party reporting legislation introduced this year,” he said. “For example, today if you receive interest on some savings account, you may only need to receive a 1099 if you have at least $10 or more of interest. Congress is actually looking to waive that, to say that for any interest you may get, even if it’s only a penny, you need to receive a 1099 for that. And part of the reason for that is because they believe there’s underreported interest income that they want to make sure is being collected. The stuff that was in the health care bill that was repealed was likely repealed because it was pretty aggressive in the amount of additional reporting that was going to be required, but what we’re hearing is that there is a likelihood that that additional reporting in some way, shape or form is probably going to be revisited and re-proposed by Congress.”
The 1099 reporting requirements in the health care reform law provoked a backlash because the increased volume was seen as too burdensome, especially for small businesses.
“The health care legislation required that the additional reporting be for any payment that you make, even to a corporation, which in the past had been exempt from any reporting, as well as on all goods, and I think that both of those pieces added up to a lot of additional 1099 reporting,” said Thibodeau. “I think we’ll see something come back that maybe isn’t both goods and corporations reporting, but maybe some subset of that. Or there will be some thresholds created that don’t make that quite as burdensome on American business.”
The Internal Revenue Service has increased its forecasts for the number of information-reporting forms it expects to receive this year and in subsequent years as a result of increased reporting requirements.
In a 2010 report, the IRS predicted that it would receive 2.175 billion information and withholding documents from U.S. businesses and individuals in 2012. But in a recently released update to that report, the IRS is now forecasting that it will receive 2.855 billion information reports in 2012, a readjustment of nearly 700 million forms, effectively a 31 percent increase. In its updated projections, the IRS is taking into account new 1099-K reporting requirements for merchants handling credit card transactions, and 1099-B requirements for buyers and sellers of shares who are now required to report information on the cost basis of the stock.
“Companies have had this 1099 reporting responsibility for 25-plus years now,” said Troy Thibodeau, executive vice president at Convey, a developer of software for automating 1099 reporting. “But the last two to three years has seen a significant increase in the amount of third-party reporting that’s taking place.”
For example, companies that process credit card payments on behalf of merchants and businesses are now required to file a 1099-K for all of their credit card proceeds as a result of the Housing Assistance Tax Act of 2008 (see IRS Postpones Credit Card Withholding Requirements).
“The IRS says that reporting alone is going to yield another 50-plus million forms that are going to need to be filed each year,” said Thibodeau.
In addition, the cost basis reporting rules in the Emergency Economic Stabilization Act of 2008 are going to lead to increased 1099-B information reporting (see Cost-Basis Reporting Changes Portend ‘Messy” Tax Season Ahead).
“This year, when you receive your 1099s as a taxpayer, if you sold or traded on stocks, you’re going to get a new 1099-B, which is going to indicate the cost of that stock on the form,” said Thibodeau. “In the past, if you sold stock, you would get a 1099 that said how much in proceeds you received from the sale of that stock, but now whoever sold the stock on your behalf is also going to have to tell you what your cost basis in that stock was. It’s the IRS’s way of determining the gains or losses you received by the sale of that stock. That legislation is going to yield up a lot more 1099 reporting because there’s a bunch of nuanced rules around that saying that if you had made, say, three purchases to accumulate all the stock that you sold, there’s a different cost basis you probably have in each of those purchases, and they have to issue you a 1099-B for every one of those purchases that you then sold. So there’s significantly more 1099-B volume reflected in those projections.”
The increased information reporting requirements are intended to help the IRS reduce its recently expanded estimates for the tax gap between money owed to the IRS and money collected (see Tax Gap Widens to $450 Billion). “The Service has declared that one of the best ways for them to continue to chip away at this tax gap of money owed is through third-party reporting,” said Thibodeau. “If they receive third-party reports of income, then the likelihood that taxpayers are going to report properly goes up significantly and compliance goes up. There’s a lot of additional third-party reporting that the Service and Congress has been looking for, and that will continue to be the case as we move forward.”
Thibodeau thinks that will be the case even though Congress repealed the expanded 1099 information reporting of business-to-business transactions in the Patient Protection and Affordable Care Act of 2010 and the Small Business Jobs Act of 2010 (see Congress Votes to Repeal 1099 Requirements). Despite the outcry over the expanded 1099 reporting requirements in the health care reform law especially, he has seen lawmakers proposing bills with tough new 1099 requirements.
“There’s been other third-party reporting legislation introduced this year,” he said. “For example, today if you receive interest on some savings account, you may only need to receive a 1099 if you have at least $10 or more of interest. Congress is actually looking to waive that, to say that for any interest you may get, even if it’s only a penny, you need to receive a 1099 for that. And part of the reason for that is because they believe there’s underreported interest income that they want to make sure is being collected. The stuff that was in the health care bill that was repealed was likely repealed because it was pretty aggressive in the amount of additional reporting that was going to be required, but what we’re hearing is that there is a likelihood that that additional reporting in some way, shape or form is probably going to be revisited and re-proposed by Congress.”
The 1099 reporting requirements in the health care reform law provoked a backlash because the increased volume was seen as too burdensome, especially for small businesses.
“The health care legislation required that the additional reporting be for any payment that you make, even to a corporation, which in the past had been exempt from any reporting, as well as on all goods, and I think that both of those pieces added up to a lot of additional 1099 reporting,” said Thibodeau. “I think we’ll see something come back that maybe isn’t both goods and corporations reporting, but maybe some subset of that. Or there will be some thresholds created that don’t make that quite as burdensome on American business.”
Monday, January 30, 2012
Tackling Those Confusing 1099 And W-2 Changes.
FROM FORBES.COM-
It’s that time of year when envelopes marked “Important Tax Return Document Enclosed” come in the mail, mixed in with the credit card come-ons. Open and scrutinize these W-2s, 1099s and K-1s right away. If they report more income than your records show, try to get corrected forms issued now to avoid a battle with the Internal Revenue Service’s document-matching computers later. Read the pointers below to avoid tripping over changes to the forms.
The 1099-B makeover
Both tax pros and financial service firms expect the new 1099-B, Proceeds From Broker and Barter Exchange Transactions, to cause mass confusion. The 2011 version, in addition to the old boxes for the date and proceeds from a securities sale, has new boxes for the date you bought a stock; your cost or basis (including adjustments for commissions and splits); whether your gain or loss was short or long term; and even if the transaction was a wash sale (one where you can’t claim a loss because you bought back the shares too soon). If your broker sends a 1099 composite report instead of a 1099-B, the composite must also have the new info.
Don’t be surprised, however, if some new 1099-B boxes are blank. That’s because the extra reporting is only required for stock bought on or after Jan. 1, 2011; mutual funds bought on or after Jan. 1, 2012; and bonds, options and private placements bought on or after Jan. 1, 2013. When reporting isn’t required, your broker should check “noncovered security” in Box 6. Note that an outfit like Charles Schwab, if it knows your basis on a “noncovered security” sale, will calculate your gain for you on the composite—but won’t send it to the IRS.
All this new info is supposed to help the IRS detect underreporting of gains while cutting paperwork for taxpayers. Right. Truth is, it’s now more important than ever to keep good records to make sure what your broker tells the IRS is correct. Retain monthly statements, year-end reports and trade confirmations, and annotate them as appropriate. Warning: If you sell only some of your holdings in a covered stock, the broker must calculate your gains using the first-in, first-out method—unless you designate another method before a sale settles. (For advice on how to find your basis on old securities, see p. 55.)
Tattletale 1099-Ks
If you run a business or sell something on the side and accept credit card payments or payments through a third-party network like eBay’s PayPal, watch out for the new form 1099-K, Merchant Card and Third-Party Network Payments. This form, too, is designed to help the IRS flag juicy audit targets. Unfortunately the 1099-K reports the gross amount paid to you, with no adjustments for fees or charge-backs, so it may not match up with the (possibly smaller) amount you report on your income tax return from such transactions. Give your tax pro records of fees and charge-backs to explain any disparity—annotated statements from the credit card company should do.
W-2 insurance scare
Employers with more than 250 workers must begin reporting on 2012 W-2s the value of health care benefits paid on an employee’s behalf. But some are already doing it on 2011 W-2s now in the mail. The amount appears in Box 12, using code DD. If there’s a big number there, don’t panic—it doesn’t affect your taxable income. The reporting is for the new “individual mandate” in Obama’s health plan. If that mandate isn’t repealed or found unconstitutional, a penalty tax on folks who don’t get insurance will be phased in, starting in 2014.
It’s that time of year when envelopes marked “Important Tax Return Document Enclosed” come in the mail, mixed in with the credit card come-ons. Open and scrutinize these W-2s, 1099s and K-1s right away. If they report more income than your records show, try to get corrected forms issued now to avoid a battle with the Internal Revenue Service’s document-matching computers later. Read the pointers below to avoid tripping over changes to the forms.
The 1099-B makeover
Both tax pros and financial service firms expect the new 1099-B, Proceeds From Broker and Barter Exchange Transactions, to cause mass confusion. The 2011 version, in addition to the old boxes for the date and proceeds from a securities sale, has new boxes for the date you bought a stock; your cost or basis (including adjustments for commissions and splits); whether your gain or loss was short or long term; and even if the transaction was a wash sale (one where you can’t claim a loss because you bought back the shares too soon). If your broker sends a 1099 composite report instead of a 1099-B, the composite must also have the new info.
Don’t be surprised, however, if some new 1099-B boxes are blank. That’s because the extra reporting is only required for stock bought on or after Jan. 1, 2011; mutual funds bought on or after Jan. 1, 2012; and bonds, options and private placements bought on or after Jan. 1, 2013. When reporting isn’t required, your broker should check “noncovered security” in Box 6. Note that an outfit like Charles Schwab, if it knows your basis on a “noncovered security” sale, will calculate your gain for you on the composite—but won’t send it to the IRS.
All this new info is supposed to help the IRS detect underreporting of gains while cutting paperwork for taxpayers. Right. Truth is, it’s now more important than ever to keep good records to make sure what your broker tells the IRS is correct. Retain monthly statements, year-end reports and trade confirmations, and annotate them as appropriate. Warning: If you sell only some of your holdings in a covered stock, the broker must calculate your gains using the first-in, first-out method—unless you designate another method before a sale settles. (For advice on how to find your basis on old securities, see p. 55.)
Tattletale 1099-Ks
If you run a business or sell something on the side and accept credit card payments or payments through a third-party network like eBay’s PayPal, watch out for the new form 1099-K, Merchant Card and Third-Party Network Payments. This form, too, is designed to help the IRS flag juicy audit targets. Unfortunately the 1099-K reports the gross amount paid to you, with no adjustments for fees or charge-backs, so it may not match up with the (possibly smaller) amount you report on your income tax return from such transactions. Give your tax pro records of fees and charge-backs to explain any disparity—annotated statements from the credit card company should do.
W-2 insurance scare
Employers with more than 250 workers must begin reporting on 2012 W-2s the value of health care benefits paid on an employee’s behalf. But some are already doing it on 2011 W-2s now in the mail. The amount appears in Box 12, using code DD. If there’s a big number there, don’t panic—it doesn’t affect your taxable income. The reporting is for the new “individual mandate” in Obama’s health plan. If that mandate isn’t repealed or found unconstitutional, a penalty tax on folks who don’t get insurance will be phased in, starting in 2014.
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