Friday, January 21, 2011

IRS Issues Important Statement Concerning Filing Your Tax Return

The IRS released a statement indicating that taxpayers who file itemized deductions may file their tax returns on February 15, 2011 and thereafter.  You can go ahead and prepare your returns, if you like, but you will need to wait until 2/15/11 to file.  Of course, you can send your information to me and I can prepare your return, if you like.  Have a great weekend!

Contact me at ric@honsacpa.com if you have any questions.

Tuesday, January 18, 2011

Itemizers, You Need To Wait

That's right, if you file a return and you itemize your deductions, you have to wait, according to the IRS.  I've copied and pasted information directly from their site.  Happy reading!

"For most taxpayers, the 2011 tax filing season starts on schedule. However, tax law changes enacted by Congress and signed by President Obama in December mean some people need to wait until mid- to late February to file their tax returns in order to give the IRS time to reprogram its processing systems.
Some taxpayers – including those who itemize deductions on Form 1040 Schedule A – will need to wait to file. This includes taxpayers impacted by any of three tax provisions that expired at the end of 2009 and were renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act Of 2010 enacted Dec. 17. Those who need to wait to file include:
  • Taxpayers Claiming Itemized Deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction that was also extended and which primarily benefits people living in areas without state and local income taxes. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
  • Taxpayers Claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students – covering up to $4,000 of tuition and fees paid to a post-secondary institution – is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit extended last month and the Lifetime Learning Credit.
  • Taxpayers Claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.
In addition to extending those tax deductions for 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act also extended those deductions for 2011 and a number of other tax deductions and credits for 2011 and 2012 such as the American Opportunity Tax Credit and the modified Child Tax Credit, which help families pay for college and other child-related expenses. The Act also provides various job creation and investment incentives including 100 percent expensing and a two-percent payroll tax reduction for 2011. Those changes have no effect on the 2011 filing season.
The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the recent tax law changes. In the interim, taxpayers affected by these tax law changes can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes. Additional information will be available at http://www.irs.gov/.
For taxpayers who must wait before filing, the delay affects both paper filers and electronic filers. The IRS urges taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax law changes and ensure accurate tax returns.
Except for those facing a delay, the IRS will begin accepting e-file and Free File returns on Jan. 14. Additional details about e-file and Free File will be announced later this month."

Tuesday, January 4, 2011

Top 10 Tax Time Tips

Top 10 Tax Time Tips 
It’s that time of the year again, the income tax filing season has begun and important tax documents should be arriving in the mail. Even though your return is not due until April, getting an early start will make filing easier. Here are the Internal Revenue Service’s top 10 tips that will help your tax filing process run smoother than ever this year.
  1. Start gathering your records Round up any documents or forms you’ll need when filing your taxes: receipts, canceled checks and other documents that support income or deductions you’re claiming on your return.
  2. Be on the lookout W-2s and 1099s will be coming soon; you’ll need these to file your tax return.
  3. Use Free File: Let Free File do the hard work for you with brand-name tax software or online fillable forms. It's available exclusively at http://www.irs.gov. Everyone can find an option to prepare their tax return and e-file it for free. If you made $58,000 or less, you qualify for free tax software that is offered through a private-public partnership with manufacturers. If you made more or are comfortable preparing your own tax return, there's Free File Fillable Forms, the electronic versions of IRS paper forms. Visit www.irs.gov/freefile to review your options.
  4. Try IRS e-file: After 21 years, IRS e-file has become the safe, easy and most common way to file a tax return. Last year, 70 percent of taxpayers - 99 million people - used IRS e-file. Starting in 2011, many tax preparers will be required to use e-file and will explain your filing options to you. This is your chance to give it a try. IRS e-file is approaching 1 billion returns processed safely and securely. If you owe taxes, you have payment options to file immediately and pay by the tax deadline. Best of all, combine e-file with direct deposit and you get your refund in as few as 10 days.
  5. Consider other filing options There are many different options for filing your tax return.You can prepare it yourself or go to a tax preparer.You may be eligible for free face-to-face help at an IRS office or volunteer site.Give yourself time to weigh all the different options and find the one that best suits your needs.
  6. Consider Direct Deposit If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a paper check. 
  7. Visit the IRS website again and again The official IRS website is a great place to find everything you’ll need to file your tax return: forms, publications, tips, answers to frequently asked questions and updates on tax law changes.
  8. Remember this number: 17 Check out IRS Publication 17, Your Federal Income Tax on the IRS website. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return.
  9. Review! Review! Review!Don’t rush. We all make mistakes when we rush.Mistakes will slow down the processing of your return. Be sure to double-check all the Social Security Numbers and math calculations on your return as these are the most common errors made by taxpayers.
  10. Don’t panic! If you run into a problem, remember the IRS is here to help. Try http://www.irs.gov or call toll-free at 800-829-1040.

Monday, January 3, 2011

New Basis Reporting Rule For Stock Transactions

The IRS will now receive information from brokerage houses that gives more details concerning the trading activities of investors.  In the past, the IRS received 1099 information returns that reported the sales prices of stocks in investors' accounts.  Basically, the IRS would receive a report on the sales price only of a stock.  The investor, however, would usually receive a report that was much more detailed, to include the purchase price of the stock. 

A very critical component of any stock sale is the basis, or typically the purchase price.  The basis is sometimes adjusted subsequent to certain events (splits, etc.)  The basis is the portion for which a taxpayer will not pay tax.  Hence, sales price minus the basis is the taxable gain.  Let's look at an example of how a taxpayer has potentially underpaid tax on a transaction. 

Jimmy Hofstra buys a share of stock for $50.  The share price goes up to $150.  Jimmy sells the stock, and reports the transaction on his tax return.  Only, Jimmy decides to "fudge" the basis number and puts "$100" for the basis amount.  Now Jimmy will be reporting a gain of $50 instead of a gain of $100.  Obviously, he will pay less tax.  And herein is a component of the "tax gap." 

Taxpayers have reported incorrect basis amounts for as long as the Treasury Department has required reporting of the transactions.  Some have been mere oversight, while many have been intentional.  I'll share another example.  Someone may every now and then report capital losses of around $3,000.  We know that capital losses are limited to $3,000 unless capital gains are greater.  But in the absence of capital gains, one may only deduct $3,000 of capital loss against ordinary income, such as wages.  Nevertheless, this someone reports the loss and pays less tax.  The only trouble is, there is no transaction.  That's right, the "transaction" is totally fabricated.

Now, this fellow knows that this amount flies under the radar screen.  The IRS typically goes after transactions that they figure will net them $2,500 or better in tax under audit, so an audit is unlikely.  Hence, this guy is playing a lottery of sorts.  The odds of the IRS ever discovering these transactions are in his favor.  If the IRS ever inquires, which is typically by letter, he can simply pay the tax.  By the way, this is just one area in which fraud is easily perpetrated against the government.

So what is an old three letter, alphabet soup agency supposed to do?  Use a new provision that forces brokers to report basis amounts.  Jimmy Hofstra will now be boxed in.  But the person in my second example may evade taxation still, if he reports a transaction other than a brokered stock sale.  Whatever the case, stocks purchased during 2010 and thereafter will have a basis amount and sales price reported to the IRS upon the sale of the shares.  So when a taxpayer reports a "sales price" and a "purchase price" of shares of stock on Schedule D of the 1040, the IRS will match that information with what is received from the brokerage house. 

The take away is the IRS can now verify that you have indeed reported the correct basis in your stock, so mistakes and outright evasion will now be caught in an efficient manner.  All of this, however, creates more work for your broker, the costs of which will be surely passed to you.