Tax return scheme delays early filers' IRS refunds.

From the Detroit Free Press -

Bad news is hitting consumers who filed 1040 federal income tax returns early. They're going to wait possibly a week or so longer than expected to get refunds as the Internal Revenue Service attempts a tougher crackdown on criminals who file fake returns to snag illegal refunds early in the season.
We got news of one such case involving a group out of Detroit this week.
John Hewitt, CEO and founder of Liberty Tax Service, based in Virginia Beach, Va., said taxpayers who filed returns any time from the first day of the tax season, Jan. 17, through Jan. 24 are facing potential delays.
"Usually, the refunds take a week to 10 days," said Hewitt, adding that refunds are likely to take up to 14 days.
Taxpayers didn't expect these delays and are upset. Many intentionally file early in the season because they need that tax refund to pay bills. Families could experience more hardship than others even with only an extra few days of delay, he said.
Though IRS officials would not say it directly, the crackdown delaying some refunds could involve a case from Detroit, where a suspected criminal ring was disrupted by federal officials.
Federal officials say that a group of metro Detroit tax preparers submitted at least 352 fake tax returns using names and Social Security numbers of the dead in an attempt to obtain more than $800,000 in refunds, according to court documents.
Two area tax preparers were arrested Friday for conspiracy to defraud the government by filing false tax returns and obtaining refunds, using the names and information of recently deceased individuals, according to U.S. Attorney Barbara L. McQuade.
According to court documents, the tax returns filed in the scheme reported false household employee income and used various credits, including the Earned Income Tax Credit and education credits, to create fake returns to generate refunds.

ID thieves file early

The IRS said, generally, that the delays are related to growing concerns about cyber-fraud and crooks who obtain refunds by stealing Social Security numbers, creating fake returns, filing 1040s electronically early in the season and obtaining tax refunds.
The best advice taxpayers are getting when it comes to preventing tax-time cybercrime is to file tax returns early. But the crooks know this, too, so maybe they're filing even earlier, too?
"It's definitely in favor of the identity thief right now," said Tami Nealy, a spokeswoman for LifeLock in Tempe, Ariz.
She noted that the IRS system has a first-come, first-served process that can give ID thieves an advantage during tax season. Say someone stole your Social Security number and name, and then filed a fake return for a refund using your ID.
If you file your real return a month or so later, again using your ID, your return is rejected if the thief filed first and was successful. And then, the headaches start.
Nina E. Olson, the national taxpayer advocate, stated in the advocates' annual report to Congress that the "IRS's approach to identity theft is still not working as intended."
The report noted that the centralized Identity Protection Specialized Unit -- the IRS department that deals specifically with ID theft -- received more than 226,000 cases in the 2011 fiscal year -- a 20% increase from fiscal year 2010.
And the Taxpayer Advocate Service experienced a 97% increase in stolen identity cases in 2011 -- on top of a 23% increase in 2010.
H&R Block told clients that the IRS is using a new technology this year that has caused the agency to take more time to validate returns at the beginning of the season.
If you're looking at a delay, tax preparers want you to know that it's not them -- it's the IRS.
Hewitt said he understands that the refunds are expected to be back to a more normal pattern for taxpayers who file returns now or later.
At the opening of the 2012 filing season, the IRS advised taxpayers who electronically file and select direct deposit that they could see their refunds in as few as 10 days and 90% of refunds are provided within 21 days.
Some taxpayers are getting refunds much faster, the IRS said, but at this time, taxpayers should expect refunds to be issued as indicated in the original IRS guidelines.
Taxpayers can go to http://www.irs.gov/ to see "Where's My Refund?"
The IRS said it apologizes for any inconvenience caused by the revised refund dates.

IRS Issues Could Delay Tax Refunds

It's news you don't want to hear.   It could take longer to get your tax refund this year.

Turbo Tax and H&R Block said problems at the IRS are causing big delays.

The IRS started its e-file system two days late. Usually it starts on Jan. 15th, this year it was Jan 17th.

Now for those people who have filed, they're going to this site(https://sa2.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp) to check the status of their refund and getting an error message.

That's because of an unplanned outage of the IRS e-file system.

Companies like H&R Block and Turbo Tax are letting customers know via Facebook and in-person about the e-file issues.

H&R Block's Central Coast district manager in Watsonville told Central Coast News Wednesday, he sees quite a few people filing their taxes early, especially families.

The delay is putting refund's behind schedule.  For example, if you filed your taxes on Jan. 17th, you should expect to see a refund Feb. 1st, a week later than normal.

"We try to explain before they start doing their taxes.  We give expectations and we try to explain what the IRS is doing this year, so that when we do the return they aren't shocked or surprised," said Fernando Paco.

Even when the IRS fixes the problems in e-filing, you could still be waiting longer to get your refund, that's because funding to the agency has been reduced the past two years.

Right now, the IRS said it is unable to answer three out of ten calls from taxpayers.

There is some good news.  Changes to the tax codes could get you some more money when you do file.

First, for every dependent you claim the credit is increasing from $99 to $315.

Next, you can continue to put money into an IRA all the way through April 17th of this year, and that will be included in your 2011 tax return.  The deadline used to be December 31st.

Finally, there are new stimulus fund credits good for one or two years. This year those include people who attend community college and trade schools. In the past, credits included first-time home buyers and energy efficient home improvements.

Tax Strategies In A Tough Economy

FROM NJTODAY.NET.

For most of us, income tax calculations don’t change much from year to year. But thanks to the roller coaster economy of the past few years, many people have undergone major life changes that can have a significant impact – good or bad – on their taxable income and how they should file taxes.
Even though April 17 (this year’s tax-filing deadline) is a ways off, it’s never too soon to start planning your strategy, particularly if you experienced financial hardships in 2011 that could affect your taxes. The IRS has a handy guide called “The What Ifs of an Economic Downturn” (search www.irs.gov) that reviews the tax impacts of different scenarios such as job loss, debt forgiveness or tapping a retirement fund.
Here’s a roundup of common economic challenges you may be facing and their possible tax implications:
You lost your job. Remember that unemployment benefits, severance pay and payout of accumulated vacation or sick leave are all considered taxable income, so if you didn’t have taxes withheld from these payments, be prepared for a potentially nasty tax bill.
If you withdrew money from your regular IRA or 401(k) account to cover expenses, you’ll owe income tax on the amount, plus an additional 10 percent penalty unless you’re over age 59 ½ or meet special circumstances. Also, outstanding 401(k) loans must be repaid (usually within 60 to 90 days of termination) or they’ll be counted taxable income – plus be subject to the same 10 percent penalty.
The good news is that many public assistance benefits such as welfare, food stamps and disaster relief payments don’t count toward taxable income. Read the IRS’s “Tax Impact of Job Loss” for details (www.irs.gov/pub/irs-pdf/p4128.pdf).
Lowered income. If you took a big pay cut or lost your job in 2011, it might lower your adjusted gross income (AGI) enough to qualify for the Earned Income Tax Credit (EITC). EITC is a “refundable” tax credit, which means that if you owe less in income tax than your eligible credit, you’ll not only pay no tax, but actually get a refund for the difference. To learn more, search EITC at www.irs.gov.
Forgiven debt. Many people don’t realize that when you borrow money from a bank or other commercial lender and the lender “forgives” the debt, you generally must count the forgiven amount as taxable income.
There are several exceptions to the rule, however: For example, the Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude up to $2 million in forgiven mortgage debt ($1 million if married filing separately) on their principal residence if it came through mortgage restructuring, foreclosure or a short sale. The mortgage exclusion is set to expire at the end of 2012 unless Congress intervenes.
Other exceptions include: Debts discharged through bankruptcy; or, if you are insolvent when the debt is cancelled, some or all of it may not be taxable. (Insolvency means your total debts are greater than the fair market value of your total assets.) For more information, search for Mortgage Debt Forgiveness at www.irs.gov.
Taxes are the last thing you want to worry about when facing financial hardships. Just be sure you’re prepared for the possible tax implications if your income or debt situation has changed in the past year.

The Serial Backdoor Roth, A Tax-Free Retirement Kitty

FROM FORBES.COM -

If your income is too high, you can’t contribute directly to a Roth individual retirement account, but you can get one in a backdoor way. Step 1: Open a traditional IRA (in your case, it’s nondeductible). Step 2: Convert it to a Roth IRA. Is it worth it? “It’s a no-brainer if you have the cash to do it,” says Kevin Huston, an enrolled agent in Asheville, N.C. who has clients both young and old doing it to shore up their retirement savings. “It especially makes sense for people who are younger because they have all these years of tax-free growth,” he says.
Basically, you get an extra $5,000 (or $6,000 if you’re 50 or older) each year that grows in the Roth IRA income-tax free. That’s $10,000 (or $12,000) a year for a married couple. Repeat each year, and you can amass a nice retirement kitty. The audience for backdoor Roths is a niche, appealing to those earning too much to contribute to Roths directly but not so much that the extra tax savings doesn’t seem worth the effort. Vanguard says that “backdoor Roth” contributions represented about 2 percent of traditional IRA contributions in 2010. That’s the year that income restrictions were lifted, and anyone—regardless of income—could convert a traditional IRA to a Roth, leading to a boomlet of Roth conversions.
Why go through the hoops of getting money into a Roth IRA? They are an amazing deal, especially for folks looking long-term and expecting higher tax rates in the future. With a Roth IRA you don’t ever have to take money out, and when you do start taking money out, it’s all income-tax-free, including the earnings. By contrast, with a traditional IRA, earnings grow tax-deferred, you have to start taking required mandatory distributions the year after you turn 70.5, and distributions count as income. A Roth can help keep your tax bite down in retirement. (Ideally you want a mix of taxable, tax-deferred and tax-free accounts to draw from in retirement.)
A Roth IRA also has other benefits. Medicare premiums are based on income, so by keeping your income down, you’ll pay a lower premium. And if you leave a Roth account to a child, he or she will have to take money out each year, but there will be no income tax hit. (Inheriting a $100,000 Roth IRA is a whole lot better than inheriting a $100,000 traditional IRA; the higher your beneficiary’s tax bracket, the bigger the savings).
Here’s how the strategy is helping a couple in their 40s build their nest egg. The wife’s in marketing with a pharmaceutical company, and the husband is a stay-at-home dad. First, she’s maxing out on her company pre-tax 401(k) plan contributions—putting away the full $17,000 for 2012—her employer doesn’t offer a Roth 401(k) option. The couple told their tax advisor Huston they want to save more, but they can’t contribute to Roth IRAs directly because her income is nearly $200,000 a year. (Once your modified adjusted gross income is $183,000 for a couple filing jointly or $125,000 for singles, no Roth IRA contributions are allowed).
But they can each contribute to a traditional IRA. They don’t get a deduction because of the wife’s high income, so it’s called a nondeductible IRA. She puts away $5,000, and he puts away $5,000 (his IRA is based on her earning and called a nondeductible spousal IRA; otherwise you have to have earned income to contribute to an IRA). Then they convert the IRAs into Roth IRAs. That sounds complicated but you can do it online, and it’s almost as easy as transferring money from checking to savings. You pay income tax the next April only on any earnings accrued between the time you contributed to the nondeductible IRA and converted to a Roth.
There’s one big caveat to the backdoor Roth: the pro rata rule. When you calculate the taxes due on a conversion, you have to take into account all your IRA assets, not just the new $5,000 nondeductible IRA. For example, if you have a traditional IRA with $95,000 of money from a 401(k) rollover (the $95,000 contributions were made on a pre-tax basis), and you make a $5,000 nondeductible contribution to a new IRA, the conversion would be 95% taxable.
So when might it make sense to skip this whole exercise? Ronald Finkelstein, a CPA and lawyer with Marcum in Melville, N.Y., said he personally makes nondeductible IRA contributions each year and has considered doing a Roth conversion but passed because he has accumulated a large sum in a traditional IRA he opened 30 years ago when he had a newspaper route. Plus, he may retire to Florida, so paying the New York state tax bite wouldn’t make sense. “You have to do the calculations,” he warns.
But sometimes it can still make sense for folks, even older folks, with big traditional IRAs, to do the backdoor Roth. Another Huston client, a 68-year-old builder, does them as part of a holistic plan to get more of his net worth into tax-free accounts so he and his wife (and grandchildren) will have the accounts to tap as part of a tax diversification strategy. He just did a $6,000 backdoor Roth for the third year in a row. At the end of each calendar year, Huston and he look at his income and decide how much to convert from his traditional IRA too (one year it was $50,000; one year $25,000), keeping in mind what would push him into a higher tax bracket.
There’s still time to make an IRA contribution for calendar year 2011 through April 17, 2012. You can double up and make your 2012 contribution too. How long should you wait to convert? “It’s a grey area,” says Robert Keebler, a CPA in Green Bay, Wisc. He suggests a waiting period of six months, although other advisors say to convert the next day to limit the tax bite on the conversion.

Charity and Your Tax Bill.

FROM THE SIMPLEDOLLAR.COM

Charitable donations do provide a reduction in your taxes, but it’s not the huge reduction that many people often think they are or expect that they are.
To understand the benefit that charitable donations give to your taxes, first you have to understand how income taxes work. This is something that many people surprisingly misunderstand.
When you earn ordinary income from working at a job, you have to pay income taxes on it. We all know that, of course. What many people don’t quite understand is how the amount you pay is calculated.
Let’s say you are a single person earning $50,000 this year. To figure out how much taxes you have to pay, you have to look at the income tax rate table. For 2011, it looks like this for single people (there’s a different table for married couples):
For income between $0 and $8,500, you pay 10% in taxes.
For income between $8,500 and $34,500, you pay 15% in taxes.
For income between $34,500 and $83,600, you pay 25% in taxes.
For income between $83,600 and $174,400, you pay 28% in taxes.
For income between $174,400 and $379,150, you pay 33% in taxes.
For income over $379,150, you pay 35% in taxes.
So, as I mentioned, we’re looking at a single person who makes $50,000 a year.
For the first $8,500 of that (the $0 to $8,500 bracket), that person has to pay 10% of the income in taxes. That’s $850 for this bracket (that’s 10% of $8,500).
For the next $26,000 of that (the $8,500 to $34,500 bracket), that person has to pay 15% of the income in taxes. That’s $3,900 for this bracket (15% of $26,000).
For the rest of his pay ($15,500), that person is in the $34,500 to $83,600 bracket, which means that person has to pay 25% of that portion of his income in taxes. That’s $3,875 for this bracket (25% of $15,500).
To figure up the person’s total tax bill, they simply add together those pieces, which totals $8,625. This person will owe $8,625 on their taxes this year.
Now, how can a person lower that amount? The most common way is through deductions. The government gives out standard deductions each year on a person’s taxes. For 2011, that amount is $5,800 for a single person. How that works is that you simply subtract that deduction from the total amount of income the person earned for the year. So, this person’s income for tax purposes is actually $44,200.
So, let’s look at this person’s actual taxes after their standard deduction.
For the first $8,500 of that (the $0 to $8,500 bracket), that person has to pay 10% of the income in taxes. That’s $850 for this bracket (that’s 10% of $8,500).
For the next $26,000 of that (the $8,500 to $34,500 bracket), that person has to pay 15% of the income in taxes. That’s $3,900 for this bracket (15% of $26,000).
For the rest of his pay ($9,700), that person is in the $34,500 to $83,600 bracket, which means that person has to pay 25% of that portion of his income in taxes. That’s $2,425 for this bracket (25% of $9,700).
To figure up the person’s total tax bill, they simply add together those pieces, which totals $7,175. This person will owe $7,175 on their taxes this year.
So, that person’s standard deduction on their taxes actually saved him $1,450. The standard deduction may be $5,800, but it only saved the guy $1,450 because the deduction just reduces his total income for the year in terms of taxes.
Charitable giving works exactly the same way. Every dollar you donate to a registered charity becomes a deduction on your taxes, just like a standard deduction.
Let’s say the person above donates $5,000 to his church (a 10% tithe) and $500 to Doctors Without Borders and another $500 to L’arche Tahoma Hope. That’s a total of $6,000 in charitable donations.
So, this person makes $50,000 a year. From that, he can subtract his standard deduction ($5,800) and he can also subtract his charitable donations ($6,000). This means that his taxable income – the amount he pays on his federal income taxes – is $38,200. Let’s look at his taxes now.
For the first $8,500 of that (the $0 to $8,500 bracket), that person has to pay 10% of the income in taxes. That’s $850 for this bracket (that’s 10% of $8,500).
For the next $26,000 of that (the $8,500 to $34,500 bracket), that person has to pay 15% of the income in taxes. That’s $3,900 for this bracket (15% of $26,000).
For the rest of his pay ($3,700), that person is in the $34,500 to $83,600 bracket, which means that person has to pay 25% of that portion of his income in taxes. That’s $925 for this bracket (25% of $9,700).
To figure up the person’s total tax bill, they simply add together those pieces, which totals $5,675. This person will owe $5,675 on their taxes this year.
In other words, this person’s $6,000 charitable contribution saved them $1,500 on their taxes. That’s because the person was in the 25% tax bracket before the donation and in the 25% tax bracket after the donation, which means that they essentially saved 25% of their donation on their taxes. (Sometimes, a donation will drop you to a lower tax bracket, which is fine.)
So, charitable donations are a great thing and they do offer some tax savings, but you don’t save $1 for every dollar you donate. Instead, you often reduce your tax bill roughly a quarter or so for every dollar you donate. That’s still a great little bonus.
Hopefully that clears things up for you!

10 tips worth remembering for year-end tax planning

The window of opportunity for many tax-saving moves closes on Dec. 31. So set aside time with your tax professional to evaluate your situation now, while there’s still time to affect your bottom line for the current tax year. With that in mind, here are 10 things to consider as the curtain closes on 2011.
1. Deferring income to 2012 means postponing taxes. Consider opportunities you might have to defer income to 2012. You might be able to delay a year-end bonus, for example. If you’re able to push what would have been 2011 income into 2012, you may be able to put off paying income tax on the deferred dollars until next year.
2. Paying deductible expenses sooner may help you in 2011. Does it make sense for you to accelerate deductions into 2011? If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012.
3. Income tax rates will remain the same in 2012. The same six federal income tax rates that apply in 2011 will apply in 2012. So, depending upon your income, you’ll fall into the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent or 35 percent bracket. As in 2011, long-term capital gains and qualifying dividends will continue to be taxed at a maximum rate of 15 percent in 2012. If you are in the 10 percent or 15 percent tax bracket, a special 0 percent tax rate will generally continue to apply.
4. Is AMT a factor?If you’re subject to the Alternative Minimum Tax, special rules apply. For example, the AMT rules can effectively disallow a number of itemized deductions, making it a potentially significant consideration when it comes to year-end planning. You’re more likely to be subject to AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions.
5. Consider IRA and retirement plan contributions. Employer-sponsored retirement plans like 401(k) plans and traditional IRAs (if you qualify to make deductible contributions) present an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) aren’t deductible, so there’s no tax benefit for 2011. However, qualified distributions are free from federal income tax. The window to make 2011 contributions to your employer plan closes at the end of the year, but you can generally make 2011 contributions to your IRA up to April 17, 2012.
6. Special distribution requirements kick in at age 70½. Once you reach age 70½, you’re generally required to start taking required minimum distributions from any traditional IRAs or employer-sponsored retirement plans you own. It’s important to make withdrawals by the date required. The penalty is steep for failing to do so: 50 percent of the amount that should have been distributed. Barring additional legislation, 2011 will be the last year to take advantage of a provision allowing individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity (these charitable distributions are excluded from your income and count toward satisfying any RMDs that you would otherwise have to take from your IRA for 2011).
7. Depreciation and expense limits will drop for business owners and the self-employed. If you’re a small-business owner or are self-employed, you’re allowed a first-year depreciation deduction of 100 percent of the cost of qualifying property acquired and placed in service during 2011; this “bonus” first-year additional deprecation deduction will drop to 50 percent for property acquired and placed in service during 2012.
8. Deductions for energy-efficient home improvements will end. This is the last year you’ll be able to claim a credit for energy-efficient home improvements (up to 10 percent of the cost of qualifying property). There’s a lifetime credit cap of $500 ($200 for windows). So, if you’ve claimed the credit in the past, you’re entitled only to the difference between the current cap and the amount you’ve already claimed.
9. Other expiring provisions. Barring additional legislation, this is the last year that you’ll be able to elect to deduct state and local general tax in lieu of state and local income tax, if you itemize deductions. This also will be the last year for both the above-the-line deduction for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals.
10. Get help. Making effective year-end moves requires a solid understanding of the rules that are in effect for both 2011 and 2012. It also requires a comprehensive grasp of your overall financial situation. A financial professional can help you evaluate potential opportunities and can keep you apprised of any last-minute legislative changes. Your tax professional can also prepare a projection to estimate your tax liability.

IRS Announces 2012 Standard Mileage Rates, Most Rates Are the Same as in July

The Internal Revenue Service today issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.
These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.
Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.