Tax Filing Deadline Rapidly Approaching

Just a reminder to those who have not yet filed their 2011 tax return that April 17, 2012 is the due date to either file your return and pay any taxes owed, or file for the automatic six-month extension and pay the tax you estimate to be due. 

Normally the deadline is April 15, but when a due date falls on a weekend or holiday, the due date is extended until the next business day.  Thus, since April 15 falls on a Sunday and April 16 is a legal holiday in Washington, D.C. (Emancipation Day), the due date for 2011 tax returns is extended until Tuesday, April 17, 2012. 

In addition, the April 17, 2012 deadline also applies to the following:

  • Tax year 2011 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due.  Late payment penalties and interest will be assessed on any balance due, even for returns on extension.  Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.
  • Tax year 2011 contributions to a Roth or traditional IRA – April 17 is the last day contributions for 2011 can be made to either a Roth or traditional IRA, even if an extension is filed.
  • Individual estimated tax payments for the first quarter of 2012 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2012 estimated taxes are due on April 17.  If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date.  Please call this office for any questions.
  • Individual refund claims for tax year 2008 – The regular three-year statute of limitations expires on April 17 for the 2008 tax return.  Thus, no refund will be granted for a 2008 original or amended return that is filed after April 17. Caution: The statute does not apply to balances due for unfiled 2008 returns. 

If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 17 deadline.  Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute.  If it is apparent that the information will not be available in time for the April 17 deadline, then let the office know right away so that an extension request, and estimate tax vouchers if needed, may be prepared.

If your returns have not yet been filed, please call right away so that we can schedule an appointment and/or file an extension if necessary.

Please contact us for a free proposal.

Penalty Relief for Financially Distressed Taxpayers

The IRS has new penalty relief for the unemployed and certain self-employed individuals on failure-to-pay penalties, which are one of the biggest factors a financially distressed taxpayer faces on a tax bill.

To assist those most in need, a six-month grace period on failure-to-pay penalties will be made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest, and any other penalties are fully paid by October 15, 2012.

The penalty relief will be available to two categories of taxpayers:

  • Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
  • Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

This penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or must not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

Taxpayers meeting the eligibility criteria will need to request the penalty relief by filing the new Form 1127A on or before the April 17th deadline. Form 1127A is not to be attached to the income tax return, but is filed separately. CAUTION: Form 1127-A does not extend the time to file your 2011 income tax return. To get an extension of time to file, you must file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until October 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.

If you have questions related to deferring your tax payment until October and the financial implications of doing so, please give this office a call.

Please contact us for a free proposal.

 

 

Can’t Pay Your Taxes by the April Due Date?

The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who end up owing?

The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest on late payments if you don’t.

So if you are unable to pay the tax you owe, it is generally in your best interest to make other arrangements for paying your taxes rather than be subjected to the government’s penalties and interest. Here are a few options to consider.

  • Family Loan – Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
  • Credit Card – Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay the credit card discount fee, you will have to pay it and pay the higher credit card interest rates.
  • Installment Agreement – If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate, and there is a user fee to set up the payment plan. In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.
  • Tap a Retirement Account – This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age
    59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.

Whatever you decide, don’t just ignore your tax liability because that is the worst thing you can do. Please call this office for assistance.

Please contact us for a free proposal.

Business Activity or Hobby

M had been a co-owner of a successful construction business before selling his interest back to the firm and leaving. He then started a new firm that bought and renovated distressed properties, purchasing two, working on them, then selling one at a profit and one at a loss, for a total net loss. He decided that the real-estate market had deteriorated and that there was no point purchasing properties he might not be able to re-sell, so he terminated the business.

At year end, he deducted on his Schedule C those expenses related to the purchase, renovation and sale of the properties and took a net loss. But the IRS said that his activities amounted to a hobby, not a business, and denied the deductions. M. appealed the decision.

Held: For the taxpayer. In addition to the taxpayer being experienced and successful in the business, he also appeared to be operating in a businesslike manner, keeping good books and records, and trying to make a profit.

For example, he carefully tracked each project’s expenses in 2006 and 2007 as well as his net profits and losses. When he realized that the prospects for future profits were bleak, he cut his losses and closed the business, which demonstrated a profit objective. [Morgan et ux. v. Commissioner, T.C. Summ. Op.]

Tip. Here are factors to be considered when deciding if a client’s activity is geared to making a profit:

  • the manner in which the person carries on the activity;
  • the expertise of the person or his/her advisers;
  • the time and effort the person puts into the activity;
  • an expectation that assets used in the activity may appreciate in value;
  • the person’s success in similar or dissimilar activities;
  • the person’s history of profit/loss in the activity;
  • the amount of occasional profits, if any;
  • the person’s financial status; and
  • any elements of personal pleasure or recreation.

Please contact us for more information.

IRS Tax Tip 2012-54 — Employee Business Expenses

Some employees may be able to deduct certain work-related expenses. The following facts from the IRS can help you determine which expenses are deductible as an employee business expense.

You must be itemizing deductions on IRS Schedule A to qualify.

Expenses that qualify for an itemized deduction generally include:

  • Business travel away from home 
  • Business use of your car 
  • Business meals and entertainment 
  • Travel 
  • Use of your home 
  • Education 
  • Supplies 
  • Tools 
  • Miscellaneous expenses

You must keep records to prove the business expenses you deduct. For general information on recordkeeping, see IRS Publication 552, Recordkeeping for Individuals available on the IRS website at www.irs.gov, or by calling 1-800-TAX-FORM (800-829-3676).

If your employer reimburses you under an accountable plan, you should not include the payments in your gross income, and you may not deduct any of the reimbursed amounts.

An accountable plan must meet three requirements:

1. You must have paid or incurred expenses that are deductible while performing services as an employee.

2. You must adequately account to your employer for these expenses within a reasonable time period.

3. You must return any excess reimbursement or allowance within a reasonable time period.

If the plan under which you are reimbursed by your employer is non-accountable, the payments you receive should be included in the wages shown on your Form W-2. You must report the income and itemize your deductions to deduct these expenses.

Generally, you report unreimbursed expenses on IRS Form 2106 or IRS Form 2106-EZ and attach it to Form 1040. Deductible expenses are then reported on IRS Schedule A, as a miscellaneous itemized deduction subject to a rule that limits your employee business expenses deduction to the amount that exceeds 2 percent of your adjusted gross income.

Please contact us for more information.

 

Work at Home?

You May Qualify for the Home Office Deduction

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The IRS has the following six requirements to help you determine if you qualify for the home office deduction.

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• as your principal place of business;

• as a place to meet or deal with patients, clients or customers in the normal course of your business; or

• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on Form 1040 Schedule C, Profit or Loss From Business.

6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

Please contact us for more information.

IRS Creates Online Search Tool for Easier Check On Information About Exempt Organizations

WASHINGTON — The Internal Revenue Service has launched a new online search tool, Exempt Organizations Select Check, to help users more easily find key information about tax-exempt organizations, such as federal tax status and filings.

Users can now go to one location on IRS.gov, select a tax-exempt organization, and check if the organization:

o Is eligible to receive tax-deductible charitable contributions (Publication 78 data, which is incorporated here). Users may rely on this list in determining deductibility of contributions (just as they did when Publication 78 was a separate electronic publication rather than part of Select Check).

o Has had its federal tax exemption automatically revoked under the law for not filing a Form 990-series return or notice for three consecutive years (known as the Auto-Revocation List).

o Has filed a Form 990-N (e-Postcard) annual electronic notice. (Most small organizations whose annual gross receipts are normally $50,000 or less are required to electronically submit Form 990-N, unless they choose instead to file a completed Form 990 or Form 990-EZ.)

EO Select Check also offers improved search functions. For example, users can now look for organizations eligible to receive deductible contributions by Employer Identification Number (EIN), which was previously not a searchable or sortable field in the electronic Publication 78. And data about organizations eligible to receive deductible contributions are now updated monthly, rather than quarterly.

In addition, organizations that have automatically lost their tax exemptions may now be searched by EIN, name, city, state, ZIP Code, country, exemption type, and revocation posting date, rather than only by state. EO Select Check also provides new pop-up help text to assist users in understanding the significance of auto-revocation search results, including the meaning of, and distinctions between, revocation dates and revocation posting dates.

EO Select Check offers search tips that provide suggestions on how to use the search application.

Please contact us for more information.

Six Facts for Adoptive Parents

If you paid expenses to adopt an eligible child in 2011, you may be able to claim a tax credit of up to $13,360.

Here are six things the IRS wants you to know about the expanded adoption credit.

1. The Affordable Care Act increased the amount of the credit and made it refundable, which means you can get the credit as a tax refund even after your tax liability has been reduced to zero.

2. For tax year 2011, you must file a paper tax return, Form 8839, Qualified Adoption Expenses, and attach documents supporting the adoption. Taxpayers claiming the credit will still be able to use IRS Free File or other software to prepare their returns, but the returns must be printed and mailed to the IRS, along with all required documentation.

3. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and/or the state’s determination for special needs children.

4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child. These expenses may include adoption fees, court costs, attorney fees and travel expenses.

5. An eligible child must be under 18 years old, or physically or mentally incapable of caring for himself or herself.

6. If your modified adjusted gross income is more than $185,210, your credit is reduced. If your modified AGI is $225,210 or more, you cannot take the credit.

Please contact us for more information.

 

Standard Deduction vs. Itemizing: Seven Facts to Help You Choose

Each year, millions of taxpayers choose whether to take the standard deduction or to itemize their deductions.

The following seven facts from the IRS can help you choose the method that gives you the lowest tax.

1. Qualifying expenses – Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. If the total amount you spent on qualifying medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions is more than your standard deduction, you can usually benefit by itemizing.

2. Standard deduction amounts -Your standard deduction is based on your filing status and is subject to inflation adjustments each year. For 2011, the amounts are:

Single $5,800

Married Filing Jointly $11,600

Head of Household $8,500

Married Filing Separately $5,800

Qualifying Widow(er) $11,600

3. Some taxpayers have different standard deductions – The standard deduction amount depends on your filing status, whether you are 65 or older or blind and whether another taxpayer can claim an exemption for you. If any of these apply, use the Standard Deduction Worksheet on the back of Form 1040EZ, or in the 1040A or 1040 instructions.

4. Limited itemized deductions – Your itemized deductions are no longer limited because of your adjusted gross income.

5. Married filing separately – When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.

6. Some taxpayers are not eligible for the standard deduction – They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.

7. Forms to use – The standard deduction can be taken on Forms 1040, 1040A or 1040EZ. To itemize your deductions, use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions.

Please contact us for more information.

Taxable or Non-Taxable Income?

Although most income you receive is taxable and must be reported on your federal income tax return, there are some instances when income may not be taxable.

The IRS offers the following list of items that do not have to be included as taxable income:

  • Adoption expense reimbursements for qualifying expenses
  • Child support payments
  • Gifts, bequests and inheritances
  • Workers’ compensation benefits (some exceptions may apply; see Publication 525, Taxable and Nontaxable Income)
  • Meals and lodging for the convenience of your employer
  • Compensatory damages awarded for physical injury or physical sickness
  • Welfare benefits
  • Cash rebates from a dealer or manufacturer

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

  • Life insurance. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are generally not taxable unless the policy was turned over to you for a price.
  • Scholarship or fellowship grant. If you are a candidate for a degree, you can exclude from income amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify for the exclusion.
  • Non-cash income. Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

All other items—including income such as wages, salaries, tips and unemployment compensation — are fully taxable and must be included in your income unless it is specifically excluded by law.

These examples are not all-inclusive. For more information, see Publication 525, Taxable and Nontaxable Income, which can be obtained at the IRS.gov website or by calling the IRS at 800-TAX-FORM (800-829-3676).

Please contact us for more information.