You, Me and Uncle Sam

April 2 – Last Day to Withdraw Required Minimum Distribution

 Last day to withdraw 2011’s required minimum distribution from Traditional or SEP IRAs for taxpayers who turned 70½ in 2011. Failing to make a timely withdrawal may result in a penalty equal to 50% of the amount that should have been withdrawn. Taxpayers who became 70½ before 2011 were required to make their 2011 IRA withdrawal by December 31, 2011.

April 10 -  Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during March, you are required to report them to your employer on IRS Form 4070 no later than April 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
April 17 -  Individual Tax Returns Due

File a 2011 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call this office.

Caution: The extension gives you until October 15, 2012 to file your 2011 1040 return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call this office to discuss your individual situation if you are unable to file by the April 17 due date.

April 17 – Household Employer Return Due

If you paid cash wages of $1,700 or more in 2011 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2010 or 2011 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.

April 17 – Estimated Tax Payment Due (Individuals)

It’s time to make your first quarter estimated tax installment payment for the 2012 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include:

• Payroll withholding for employers;
• Pension withholding for retirees; and
• Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de-minimis amount, no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:

• The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
• The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for higher-income taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.

However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than the 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.

CAUTION: Some state de-minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.

April 17 – Last Day to Make Contributions

Last day to make contributions to Traditional and Roth IRAs for tax year 2011.

A regular form of fundraising by charitable organizations consists of sales or auctions of property or services at a price in excess of value. These are referred to as “quid pro quo” contributions or dual payments made that consist partly of a charitable gift and partly of consideration for goods or services provided to the donor. 

Quid pro quo contributions typically include the purchase of tickets for sightseeing tours, all-expense-paid trips, theatrical or concert performances, books or subscriptions to magazines, stationery, candy, etc., and are sold with a generous mark-up that is designed to help the charity in performing its functions. In these cases, the charitable deduction is the excess of the payment over the value received by the purchaser-contributor. For instance, when tickets to a show are purchased from a charity at a price in excess of the normal admission charge, the excess over the latter (plus tax) is a charitable contribution. 

Determining and documenting the amount of the purchase that represents the charitable portion is the key to being able to take a charitable tax deduction for quid pro quo purchases. Tax law requires charitable organizations that receive a quid pro quo contribution in excess of $75 to provide a written statement, in connection with soliciting or receiving the contribution, that informs the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the amount of the purchase that is in excess of the value of the property or service purchased and a good-faith estimate of the value of the good or services purchased. 

Example #1—A taxpayer purchases a cookbook from a charity for $100. The charity provides the taxpayer with a good faith estimate of $20 for the value of the book in a written disclosure statement. Thus, the taxpayer’s charitable deduction is $80 ($100 minus the $20 value of the book).

Example #2—A taxpayer attends a charity auction. The charity provides a catalog of the items for auction and a good-faith estimate of the value of each item. The taxpayer is the successful bidder for a vase valued at $100 in the catalog, for which the taxpayer bid and paid $500. The taxpayer’s charitable deduction is $400 ($500 minus the good-faith valuation of $100).

Example #3—A taxpayer pays $40 to see a special showing of a movie for the benefit of a qualified charity. The ticket read “Contribution $40”. If the regular price for the movie is $10, the contribution would be $30 ($40 minus the regular $10 ticket price).

If you made or are considering making a quid pro quo purchase from a charitable organization and have questions relating to the amount that will represent a charitable contribution, please give this office a call.

The Housing and Economic Recovery Act of 2008 required third-party payment entities, such as credit card companies, to begin filing informational returns with the IRS reporting merchant card transactions, such as credit and debit card payments.  The purpose was to give the IRS the ability to match a business’s credit and debit card sales with the amount the business reported on their tax return.

This reporting requirement began for the 2011 tax year using the new IRS Form 1099-K. In addition, the IRS added a line to the various 2011 business returns to separately report income from credit and debit transactions. However, for the 2011 tax year, the IRS instructed businesses to leave that line blank, allowing a one-year grace period to modify their bookkeeping and recordkeeping to enable them to reconcile their income between credit and debit card income and other sources of income, such as checks and cash, for 2012.  

This reconciliation requirement added a substantial bookkeeping burden to businesses—especially small businesses—and many trade and business associations across the nation have been lobbying the government to drop the 1099-K reconciliation requirement.

On February 9, in a letter to the National Federation of Independent Businesses, Steven Miller, Deputy IRS Commissioner, stated that the 1099-K entry line will be dropped from the 2012 and all future business returns, eliminating the need for businesses to reconcile their incomes with the 1099-K informational reporting.

Even though the reconciliation requirement is being eliminated, a business owner must recognize that the IRS is still receiving 1099-Ks reporting the business’s credit and debit card income. The IRS is expected to develop models of various business types so they can extrapolate the credit and debit card income and arrive at an estimated gross income for the various types business. This will help them select their audit targets.

If you have any questions, please give this office a call.

Beginning with the 2011 tax return, reporting stock transactions has become significantly more complicated because of the new requirement for brokerage firms to track the purchase price of stocks acquired in 2011 and subsequent years and to include that information on the information-reporting document 1099-B.

For several years now, the IRS has required brokerage firms to report the gross proceeds from the sale of stocks and other securities on the Form 1099-B. But just knowing the proceeds from a security sale does not allow the IRS to verify the profit or loss reported by the taxpayer. So beginning with 2011 purchase transactions, brokers are required to track the price paid for the securities and include that information on the 1099-B when that particular security is subsequently sold.

This new system of reporting is not a solve-all solution for the IRS because it does not have the cost or basis information for securities acquired prior to 2011 or for securities acquired by gift or inheritance. Special adjustments are required for wash sales and when sales can be attributed to a prior purchase of the same security. Some brokers also may report on Form 1099-B the cost information, if known, for stocks purchased prior to 2011.

So that the IRS can use the new data to verify taxpayer profit or loss transactions attributable to purchases where the cost information is included on the 1099-B, the year’s transactions must now be broken down into six categories (the last two categories listed do not apply to stock transactions but may apply to sales of other capital assets):

• Long-term sales where the broker IS reporting the cost of the security
• Short-term sales where the broker IS reporting the cost of the security
• Long-term sales where the broker IS NOT reporting the cost of the security
• Short-term sales where the broker IS NOT reporting the cost of the security
• Long-term sales for which no 1099-B is issued
• Short-term sales for which no 1099-B is issued

To accommodate separating the transaction into the six categories, the IRS has provided a new Form 8949. A separate 8949 must be used for each category. This will allow the IRS to match and verify transactions where the brokerage firm supplied the cost basis.

Now that the IRS has profit or loss matching capabilities, it is important to correctly report the transactions as the IRS expects to see them. Failure to do so could lead to correspondence audits or even face-to-face audits.

Please call this office if you have questions relating to reporting your security sales this year.

Congress gave all wage earners a short-lived 2012 reprieve by temporarily extending the 2% payroll tax cut though February of 2012.

The payroll tax, frequently referred to as FICA or OASDI on your paycheck, has historically been 6.2%. This is the tax that funds the Social Security Administration. For 2011, as an economic stimulus measure, Congress temporarily reduced the rate to 4.2%. They also provided self-employed individuals with a corresponding two percentage point reduction by lowering the Social Security portion of the SE tax from 12.4% to 10.4%.

Congress had previously extended this 2% tax cut and now has decided to continue this reduction in payroll tax through the end of 2012.

If you have any questions, please give this office a call.

Last month, we cautioned you about Internet scams aimed at tricking you into divulging information that will compromise your identity. That article described how Internet crooks disguise themselves as the IRS in an attempt to steal your identity.

The IRS is not the only disguise these scammers use. They pretend to be attorneys representing estates, lottery payouts, and other such subterfuge to draw you into their web.

Here are some good rules to follow:

1.    If it’s too good to be true, it probably isn’t true.

2.    If you receive a request for financial information via the Internet, it is probably a scam.

3.    Never give your financial information over the Internet except when you are absolutely sure with whom you are dealing.

Take this example of how clever scammers can be. The latest scam is an e-mail requesting individuals to update their Intuit accounts. The e-mails claiming to be from Intuit ask recipients go to what is supposed to be an Intuit web site and update their tax return information. The e-mail includes an Intuit logo in the header. The scammer selected Intuit as the bait because so many individuals and small businesses use their Quicken and Quickbooks products.

So do not be fooled by this scam or any others that do not make sense. Do not be hasty; stop and carefully consider what you are doing before you click on a link to a potentially dangerous web site. These people are clever and can disguise their scams well.

If you ever have questions related to suspect e-mails, please call this office before responding to them.

Want your refund faster? Have it deposited directly into your bank account. More taxpayers are choosing direct deposit as the way to receive their federal tax refunds. More than 79 million people had their tax refunds deposited directly into their bank accounts in 2011. It’s a secure and convenient way to get your money in your pocket faster.

• Speed—When combining e-file with direct deposit, the IRS will likely issue your refund in as few as 10 days.

• Security—Direct deposit offers the most secure method of obtaining your refund. There is no check to lose. Each year, the U.S. Post Office returns thousands of refund checks to the IRS as undeliverable mail. 
• Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund check stolen.
• Convenience—There’s no special trip to the bank to deposit a check!
• Options—You can deposit your refund into multiple accounts. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts at up to three differentU.S. financial institutions.
• Fund Your IRA—You can even direct a refund into your IRAS account.

To set up a direct deposit, you will need to provide the bank routing number (9 digits) and your account number for each account into which you wish to make a deposit. Please have them available at your appointment.

If you have questions, please give this office a call.