Pronto Tax Class | Newsletter | January 2012
Last Minute Pre-Tax Season Update
This newsletter is a FREE tax update for all ProntoTaxClass.com Students for 2011. As a thank you for choosing our education course, we want to let you know about a few changes that have taken place recently so that you are at maximum readiness for this tax season.
Here are a few things we think you will benefit from knowing as tax season starts:
Payroll Tax Cut Extended for Two Months
Congress extended the payroll tax cut until the end of February 2012.
As you likely already know, this tax cut was in place for 2011, and decreases the “employee side” of the Social Security Tax from 6.2 percent of wages to 4.2 percent of wages. Self-employed people also enjoy a cut in the Self-Employment Tax from 15.3 to 13.3 percent of net business income. It’s all part of the “put money in people’s paychecks” strategy and this strategy will continue…at least for another two months.
Stay tuned! It’s estimated that 160 million Americans benefit from this tax cut. If it is not extended at the end of this two month extension, paychecks will get smaller by 2 percent.
First Day of IRS Electronic Filing Will Be…
January 13, 2012 is the first day that it will be possible to electronically file tax returns to the IRS. The first day that IRS will accept any e-filed tax returns, though, will be January 17, 2012.
The first scheduled direct deposit date of federal tax refunds is January 26, 2012.
However, keep reading to discover why many taxpayers may receive their federal tax refunds much faster than anticipated this year, in as little as 3-5 days.
How Fast Can Your Clients Get their Tax Refunds?
This is a key question for many tax clients and there have been several major developments in this area.
The bad news for clients who want their tax refunds as fast as possible is that the 24-48 hour Refund Anticipation Loan (RAL) product appears to be almost completely dead. H&R Block is not doing RALs at all this tax season and even tax prep companies who are doing RALs can expect extremely low loan approval rates due to the IRS removing the “debt indicator” used by RAL banks to determine whether or not taxpayer will receive the refund and thus pay back the loan. Without that debt indicator, it is understandably difficult for banks to lend.
Moreover, there have been several successful multi-million dollar class action lawsuits against RAL lenders due to the high interest rates and questionable ethics involved with the RAL program as a whole.
At the same time, beginning this tax season, IRS is promising to start implementing its vaunted “CADE” program whereby taxpayers with straightforward tax returns should be able to receive their federal tax refunds within 3-5 days via direct deposit. IRS reports that up to 75 percent of all taxpayers will qualify to have their refunds accelerated through the CADE program (Earned Income Credit recipients are not likely to qualify for accelerated refunds, though). The CADE program may put the final nail in the coffin of the Refund Anticipation Loan.
As we all know, these past few years have been really tough financially for many people, so you can expect to hear the “When am I getting my money?” question a lot.
Hopefully this quick primer on the RAL and CADE situation will give you the info you need to answer that question. Just be careful about promising 3-5 days; as tax preparers, we have no control over when the IRS sends the money, whether the taxpayer qualifies to go through the CADE system, etc.
When and Why to Use E-File Opt-Out Form 8948
Beginning this tax season, every tax preparer who anticipates filing more than 10 tax returns is required to e-file all federal tax returns. However, just as California allows an opt-out, the IRS will also allow tax preparers to opt-out of electronic filing in some cases.
Use Form 8948 if the taxpayer does not want to e-file, and attach it to the front of the tax return before mailing it. You can also use Form 8948 if a tax return has been rejected multiple times through the e-file system and you cannot resolve the e-file error.
In short, the requirement to e-file all tax returns does allow for some exceptions to the rule.
IRS Letters and Visits to Tax Preparers Increase Markedly in 2011
The IRS has changed strategy over the past year in terms of taxpayer compliance, and is starting to put much more onus on the tax preparer to ensure that taxpayers are not overstating deductions, claiming the Earned Income Credit incorrectly, and so forth.
IRS has sent out thousands of letters to “at-risk” tax preparers. Make sure that anytime you’re dealing with EIC, Schedule A Itemized Deductions, or Schedule C Business Income, you are exercising “due diligence” and providing some level of verification of taxpayer claims.
You can still rely “in good faith” upon information furnished by the taxpayer. But at the same time, you can expect problems with the IRS if you are filing questionable and/or bogus tax returns.
EIC Tax Preparer Lack of Due Diligence Penalty Increased to $500 per Incident
In the “yet more good news” department, the tax preparer penalty for lack of due diligence with regard to the Earned Income Credit has been increased to $500 per incident.
Due diligence for EIC is mainly targeted towards taxpayers claiming the EIC for qualifying children, so make sure to verify, as the Schedule EIC Checklist 8867 indicates, that the qualifying child meets the main three requirements for EIC, which are:
- Age
- Residency
- Relationship
Also, Form 8867 is now required to be submitted with the tax return, rather than only maintained in the tax preparer’s files as was the case in past years. If you look at the Form 8867 for tax year 2011, you can see that the name and PTIN of the tax preparer is now included as part of the Form 8867 itself. If you mail in the tax return, the Form 8867 must be included or else the tax return will be sent back as incomplete.
With the 8867 as part of the tax return, the IRS can better track which tax preparers are submitting questionable Earned Income Credit claims, which can now be penalized at a rate of $500 per incident.
If you do a lot of EIC tax returns, we would advise you to step up your due diligence practices to avoid having problems in this area.
Changes to Schedule D; Form 8949 Now Must Be Included with Schedule D
As we reported in our RenewCTEC.com course, IRS is now requiring stock brokers to report the basis of capital assets “when feasible” on Form 1099-B. Previously, only the sales proceeds were reported to IRS by stock broker, allowing taxpayers and tax preparers to input the basis of each asset without third party verification from the broker transacting the asset sale.
Going forward, IRS requires that the stock broker provide third party verification of the basis of the asset. This new requirement has led to some pretty major changes on Schedule D and the creation of a new Form 8949.
The Form 8949 is a new “attachment” for the Schedule D that shows the short-term capital gains or losses and the long-term capital gains or losses in yet more detail. Note that you have to submit a separate Form 8949 for the short-term gain/loss details, the long-term gain/loss details, and the gain/loss details with asset basis not reported on Form 1099-B according to the new stock broker reporting requirements. Look at the Form 8949 to see how this works.
The bottom line here is that IRS is now unwilling to “take the taxpayer’s word for it” as to what is the basis of capital assets disposed of; taxpayer (and tax preparer) must now submit, in addition to Schedule D, this new Form 8949 showing all the details of each asset disposition.
IRS Discusses the Creation of a More “Real Time” Tax System
As all tax preparers know, the federal income tax system is not always the most efficient thing in the world. For example, the IRS may not send out the CP2000 letter showing a discrepancy between third party information (e.g. W-2s, 1099s, etc.) and the taxpayer’s tax return for two or three years—even though by the time the taxpayer submits the tax return, IRS already has the third party information in its computer systems.
In light of this problem, IRS is discussing the implementation of a more “real time” tax system in the future. For instance, a taxpayer’s tax return would be “matched up” with the third party data at the time that the tax return is submitted, rather than two years later. For example, a taxpayer who is not reporting a W-2 would receive a notice from the IRS that the tax return was not accepted through electronic filing because of the income omission.
Nothing is for certain on this yet, but certainly this is something to be aware of as a tax pro and kind of an interesting idea.
Schedule C Line 1a “Merchant and Third Party Payments” Can Wait Until Next Year
As reported in our RenewCTEC.com course, IRS will now begin requiring credit card processing companies to report the amount of credit and debit card sales for their business clients directly to the IRS, on Form 1099-K. This is an attempt to stop business owners from underreporting their cash sales, as so many business owners do.
If you look at the Schedule C on Line 1a, you will see a new space for “Merchant and Third Party Payments” where, in future years, the credit and debit card sales as reported by credit card processors on the 1099-K will be “broken out” as a separate line item, and then the cash sales (or non-third-party-verified sales let’s say) will go on a separate line. This way, IRS can use averages for different business types to identify underreporting of income.
IRS will NOT require this new line to be filled out for tax year 2011. Nevertheless, tax pros who deal with Schedule C business owners should be familiar with this new requirement and how it will impact business owners: it will be more difficult to not report cash sales.
IRS Will Not Require Fingerprinting of New Tax Preparers
Beginning on April 18, 2012, you will not be able to become a tax preparer without passing the IRS Competency Exam. Existing tax preparers who don’t hold an advanced designation such as CPA or EA will also need to pass this IRS test by December 31, 2013 in order to continue doing taxes professionally; so you have a couple years to study up.
However, IRS has chosen to pull back from the idea that tax preparers should be fingerprinted.
Details about IRS Competency Exam Start to Come Clear
As of November 2011, IRS is now actually administering, through Thompson Prometric, the first round of IRS Competency Exams to become a “Registered Tax Return Preparer” (RTRP).
One key detail has emerged of late on this test and that is the fact that tax preparers will have access to IRS Publication 17 during the exam, so you will have some ability to look up the answers in the book so to speak. However, there is a time limit for the test. Also, the test will only be available in English. It costs $116 to take the test and you can take the test up to three times (but you must pay the $116 each time).
You can read more about the IRS Competency Exam at www.irs.gov.
Pronto Income Tax of California, Inc. offers a 60 hour basic income tax course at ProntoTaxClass.com that addresses many of the topics that are on the IRS Competency Exam. Additionally, we are currently developing a course specifically for the IRS test.
Tax Preparation Fees Set to Rise this Year
Finally, some good news! According to a report by research firm CPA Trendlines, tax professionals anticipate being able to raise fees by an average of 4 percent this tax season.
Considering all the new IRS requirements (with costs attached) affecting tax professionals, it seems only reasonable that prices for tax preparation have some room to go up. Right before tax season is the best time to evaluate your pricing method and see if and how it should change in light of all these new rules and regulations.
However, in the process of raising prices, tax pros should never underestimate the power (and the marketing hype) of TurboTax. Therefore, we would humbly advise you to realize that over-charging clients is a great way to lose clients in this age of intense competition.
Exemption Allowance for 2011 is $3,700.
There is no exemption phase-out for 2011. High-earning taxpayers can keep the entire amount of their exemptions for another year, regardless of how much income they earn.
Standard Deduction
Joint & Surviving Spouse 11,600
Head of Household 8,500
Single & Married, Separate 5,800
Additional amount for those at least 65 and/or blind
Joint & Surviving Spouse 1,150
All others 1,450
Dependent Standard Deduction
Base Amount 950
Additional Amount 300
(adds to earned income)
For 2011, the Making Work Pay Credit has expired. Employee’s share of social security withheld from payroll has been reduced from 6.2% to 4.2%. Withholding of social
security continues, recall, until taxpayer makes more than $106,800.
In 2013 Hospital Insurance rate (Medicare) will increase by .9% (currently at 1.45%) for individual taxpayers whose income exceed a certain amount (Single, $200,000; married filing joint, $250,000; married filing separate, $ 125,000).
Medical Care Reimbursements from employer-provided health insurance are generally extended to children of employees who have not yet reached the age of 27.
- Also applies to self-employed individuals whose dependents are covered by health insurance.
- Child no longer has to qualify as a dependent in order to be covered.
For the self-employed — health insurance paid on behalf of proprietor, spouse or eligible children
under the age of 27 would generally be deducted as an adjustment on Form 1040.
Capital Gain Rates: Current capital gains tax rates, including 15 percent on long-term capital gains and 0 percent long-term capital gains rate for certain low and middle income taxpayers, have been extended through the end of 2012.
Security Sales: Beginning in 2011, every broker that is required to issue an information return as part of a covered security transaction must include on the information return, if feasible, the adjusted basis of the client in the security sold and whether any gain or loss is short-term or long-term. This should help tax preparers more accurately report basis information on Schedule D.
Foreign Account Reporting Requirements (FBAR).
- As you may have heard in the news, IRS is cracking down on unreported income from overseas bank accounts. IRS now requiring banks to report more directly to IRS, through Foreign Account Reporting Requirements or FBAR.
- FBAR applies to any United States person who has a financial interest in or signature or other authority over any foreign financial accounts if the aggregate amount in these accounts exceeds $10,000 at any time during the calendar year. Penalties for non-compliance are severe.
- Form TD F 90-22.1 is used to fulfill reporting requirements.
Bonus Depreciation: Congress has increased the bonus depreciation limit from 50% to 100%
(subject to limitations) for the period of Sept. 9, 2010 through Dec. 31, 2011. Amount reverts to 50% after 2011.
Section 179 Expense: In 2010 and 2011 limit is $500,000. Limit is supposed to revert to
$125,000 beginning in 2012.
Mileage Rates for 2011: For the first six months of 2011, business mileage can be deducted at a rate of 51 cents per mile, and Moving and Medical mileage deductions are 19 cents per mile. For
the last six months of 2011, business travel goes up to 55.5 cents per mile, and Moving and Medical miles go up to 23.5 cents. Charitable mileage remains at 14 cents for whole year.
American Opportunity Credit: Credit has been extended through tax year 2012.
Above-the-Line Tuition Deduction: Credit has been extended to end of 2011.
As part of Healthcare Reform Law, the federal Adoption Credit is now refundable for tax year 2010 and 2011. Prior to tax year 2010, Adoption credit was a non-refundable tax credit. This is a HUGE change for taxpayers who adopt children in 2011.
Coverdell Educational Accounts: Coverdell accounts are customarily used to put aside money to pay for future educational expenses of taxpayer’s children / grandchildren. Account is similar to a Roth IRA in that it is not deductible upon contribution, but is not taxable upon withdrawal (including any earnings from the account) if requirements are met. $2,000 contribution limit for Coverdell accounts has been extended through 2012.
Teachers $250 Above-The-Line Deduction for Classroom / Teaching Supplies: This deduction has been extended through 2011.
IRS has loosened tax treatment of cell phones used for business purpose, allowing more deduction, generally speaking, for cell phones that are used in the conduct of business.
Child Tax Credit has been extended in its present form through 2012.
Roth IRA AGI Conversion: Beginning in 2010, the $100,000 modified AGI limit on conversions of traditional IRAs to Roth IRAs is eliminated, and married taxpayers who file separate are now allowed to convert traditional IRA funds into a Roth IRA.
For conversions made in 2010 taxpayer can elect to choose between:
-
- Including income from Roth conversion on 2010 return; or
- Including one-half the conversion income in 2011 and one-half in 2012.
First-Time Homebuyer Credit Recapture
Reminder: taxpayers who received $7,500 credit in 2008 must generally recapture credit over a period of fifteen years beginning in tax year 2010. For 2011, there is no longer a First-Time Homebuyer Credit, neither on the Federal side nor the California state side.
Homeowner Energy Credit, which used to be 30%, has now been reduced to generally a 10% credit of eligible energy-saving improvements, up to a maximum lifetime credit of $500. This is a significant decrease of the Energy Credit, both in terms of percentage and dollar maximum.
Alternative Minimum Tax
AMT Exemption Amounts Exemption Phase Out Full Phase Out
Joint & Surviving Spouse 74,450 150,000 447,800
Single & Head of Household 48,450 112,500 306,300
Married, Separate 37,225 75,000 223,900
AMT Offset for Nonrefundable Personal Credits (Credits which may offset AMT):
- Dependent Care Credit;
- Credit for the Elderly and Permanently Disabled;
- Adoption Credit;
- Child Tax Credit;
- Mortgage Credit;
- Hope, American Opportunity, and Lifetime Learning Credit;
- Lower Income Saver’s Credit;
- Residential Energy Efficient Property Credit;
- Alternative Motor Vehicle Credit.
Estate Tax:
- For 2011 and 2012 there is a $5 million per person exemption with a top tax rate of 35%.
- The above exemption applies to estate, gift and generation skipping taxes.
- There is also a provision through 2012 that permits the executor of a deceased spouse’s estate to transfer any unused personal exemption to the surviving spouse.
Third-Party Payment Transactions
Beginning in 2012, banks and other payment settlement entities will make an annual information report to the IRS (Form 1099-K) that will enable the IRS to determine a business’s gross income from credit and debit card sales. The above rule applies to 2011 transactions. This is an effort by IRS to close the “tax gap,” much of which is attributed to unreported business income.
IRS Competency Test and IRS Licensing for Pro Tax Preparers:
All individuas who prepare all, or substantially all, of a tax return or claim for refund for compensation must apply and receive a PTIN that will be used as their sole identifying number. This rule was put into place on December 31, 2010 and continues.
- All tax preparers who have a PTIN (except for attorneys, CPAs, enrolled agents, enrolled retirement plan agent or enrolled actuary) must pass an IRS competency exam by the end of the year 2013. The IRS Competency Test will only be given in English.
- All tax preparers, except those listed above, must fulfill IRS continuing education requirements beginning in 2012, which will consist of at least 15 hours, 10 of which will be on federal tax law topics, three on federal updates and two hours on ethics. The IRS continuing education scheme will, hopefully, be coordinated with CTEC requirements.
- “Provisional” PTINs will continue to be issued until at least April 18, 2012, without the requirement of passing the IRS competency test before the PTIN will be issued.
- Preparers will start renewing their Preparer Tax Identification Numbers (PTIN) after October 15, 2011, for 2012. Preparers will need to renew their PTIN every year. It appears that IRS fee for PTIN renewal will be same ($64.25) that was charged last year.
- Stay tuned on this topic because IRS is still busy finalizing these requirements and the whole system is something of a work-in-progress.
- Here is a link to the latest IRS article concerning the new PTIN requirements and the upcoming IRS Competency Test: http://www.irs.gov/pub/irs-drop/n-11-80.pdf
Advance Earned Income Credit is not available for 2011.
1099 Rule Revision
IRS, for 2011, is NOT requiring recipients of rental income or those individuals or businesses making payments over $600 to a corporation to report those payments to the IRS on Form 1099.
This rule was supposed to go into effect, but ultimately was dismissed by Congress.
Innocent Spouse Ruling
IRS is no longer holding to their previous position that innocent spouses must apply for relief within a two year period beginning with the date the IRS started collection action. For innocent spouse taxpayers who were late in reporting their innocence, then, this represents a loosening of the rules that may be able to save your innocent spouse clients significant money.
CALIFORNIA STATE UPDATE 2011
Dependent Exemption Credit for 2011 is $315.00. Remember that for 2010, the dependent exemption credit for CA was reduced to $99. So this “re-increase” of the dependent exemption credit will be a welcome tax cut for taxpayers with dependents.
Personal Exemption Credit for Single, Married Filing Separately, and Head of Household is $102.00.
Personal Exemption Credit for Married Filing Jointly, Qualifying Widow(er) is $204.00
Blind? Add an extra $102. Age 65 or over? Add an extra $102.
Phaseout of Exemption Credits: Reduced by $6 for each $2,500 ($1,250 for Married Filing separately) in excess of federal AGI amounts of:
- Single; Married, filing separate $166,565
- Head of Household $249,852
- Married, filing joint: Qualifying Widower $333,134
California Standard Deduction
- Married Filing Jointly, Head of Household : $7,538
- Single & Married Filing Separately: $3,769
- Minimum standard deduction for dependents: $950
Itemized Deductions: Reduced by the lessor 6% of the excess of the of the taxpayer’s federal AGI over the threshold amount or 80% of the amount of itemized deductions otherwise allowed for the taxable year. Threshold amounts are:
- Single, Married Filing Separate $166,565
- Head of Household $249,852
- Married Joint or Qualifying Widow(er) $333,134
State Disability Insurance (SDI) Rate for 2011 is 1.2% up to a maximum wage base amount of $93,316.
Cancellation of Debt
FTB began mailing letters in January of 2011 to pre-selected individuals who received a Form 1099-C for tax years 2007 and 2008 to check their qualification for exemption of COD income. It remains to be seen how this will play out for canceled debt from short sales, foreclosures, etc.
California Child & Dependent Care Credit is still in effect but is no longer refundable.
Use Tax
- As you may have heard, California is pursuing “use tax,” which is a form of sales tax, as a form of possible revenue for the state.
- Use tax is owed when individuals or businesses in California use, consume, give away, or store tangible personal property (things you can see, weigh, feel, or touch) that they purchase from out-of-state sellers including purchases from retailers, through the mail, over the telephone, or online. Internet sales are especially in the crosshairs here.
- Businesses that meet the definition of a “qualified purchaser” must register with the Board of Equalization (BOE) and file a return by April 15 of each year.
A “qualified purchaser” is a person that meets all of the following criteria:
o The person receives at least $100,000 in gross receipts from business operations per calendar year.
o The person is not required to hold a seller’s permit or certificate of registration for use tax.
o The person is not a holder of a use tax direct payment permit.
- All new applicants have been automatically registered by the BOE for years 2008, 2009 and 2010.
- Expect the State of CA to continue to increase the focus on trying to collect use tax, especially from business owners who meet the criteria named above.
New Jobs Credit: Form 3527
This credit actually became effective at the beginning of 2009 but has been somewhat overlooked. California has allocated $400 million dollars but as of 8/6/2011 only approximately $61 million has been used. Here are the details to know on the CA New Jobs Credit:
Provisions:
- Up to $3,000 for each additional full-time employee hired;
- For small businesses with less than 20 employees at the end of the preceding year;
- Credit is prorated on an annual full-time equivalent basis for employees employed less than a year;
- Credit must be claimed by individual or business on a timely filed return before the credit has been used up.
Qualifications:
- Each qualified full-time hourly employee is paid wages for not less than an average of 35 hours per week
- There is a net increase in qualified full-time employees compared to the number of full-time employees employed in the preceding taxable year.
Employees who are not eligible would be those who are:
- Certified as a qualified employee in an enterprise zone or targeted tax area;
- Certified as a qualified disadvantaged individual in a manufacturing enhancement area;
- Certified as a qualified disadvantaged individual or qualified displaced employee in a local agency military base recovery area.
- An employee whose wages are included in calculating any other credit allowed.
New Home and First-Time Buyer Credit:
Taxpayers receiving either credit were to allocate amount over three year period beginning in 2010, meaning taxpayers get 1/3 of the credit each year. Be careful not to miss credit in 2011 and 2012. Especially for new clients, your tax software may not automatically pick up this “carryover” credit, so make sure to check and see if there is more credit to be used!
For New Home Credit, taxpayers were to have entered into an enforceable contract sometime
before the end of 2010. However, escrow did not have to be completed until August 1, 2011.
Pronto Income Tax of California, Inc. Approved by IRS to Offer Continuing Education
2012 will be the first year of federally-required continuing education for professional tax preparers. Starting in 2012, that is, existing tax preparers will need to do at least 15 hours of continuing education provided by an IRS-approved continuing education provider.
Fortunately, you will be able to use your CTEC 20 hours to satisfy this new federal requirement, i.e. the IRS is coordinating its continuing education requirement with CTEC. In other words, you won’t need to do 20 hours CTEC-approved continuing education and 15 hours of IRS-approved continuing education, but can just do 20 hours to satisfy both requirements.
Pronto Income Tax of California, Inc. was recently approved by the Internal Revenue Service as a provider of continuing education and this accreditation will allow us to help you “kill two birds with one stone” next year and satisfy both your California and your federal CE requirements with one 20 hour course instead of needing to take (and pay for) multiple courses.
Our continuing education course is offered at RenewCTEC.com.
So, those are the tax updates since we last talked. Again, we thank you very much for choosing our course and we hope this additional last minute tax update is helpful to you!
If you identify a change that we have not highlighted, will you please send us an email at teacher@pronto4tax.com and tell us what we’re missing? Your input as a tax professional is extremely important to us in helping to improve our courses in 2012 and beyond. We respect you as a tax professional and we certainly don’t think we know it all.
There is always more to learn and we want to learn from you.
Thank you again and last but not least, Happy New Year!!!
Sincerely,
Andy Frye
www.ProntoTaxSchool.com
www.RenewCTEC.com
For Tax Year 2011
© 2011 Pronto Income Tax of California, Inc.
Copyright and other intellectual property laws protect these materials. Reproduction or retransmission of the materials without the prior written consent of the copyright holder is a violation of copyright law.
A single copy of the materials available through this course may be made, solely for personal, noncommercial use. Users may not distribute such copies to others, whether or not in electronic form, whether or not for a charge or other consideration, without prior written consent of the copyright holder of the materials.
Requests for permission to reproduce or distribute materials contained in this course may be sent to:
Pronto Income Tax of California, Inc.
Attention: Andy Frye
208 E. Carson St. #208
Carson, CA 90745
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