Tuesday, January 25, 2011

Time to Start Thinking About 2010 Income Tax Filings

Many Americans will have to wait up to a month to file their 2010 tax returns this year.

That's because Congress' late action in December on extending tax credits is forcing the Internal Revenue Service to update its computer system to process claims.

"A lot of taxpayers will face a delay in filing a return because of the late changes," IRS spokesman Mark Hanson said.

Three groups will have to wait until mid- to late February before they can file. They are filers who itemize deductions; those who claim a higher education tuition and fees deduction; and K-12 educators who claim an out-of-pocket expense of up to $250 even if they don't itemize.

"The majority of taxpayers will be able to fill out their tax returns and file them as they normally do," IRS Commissioner Doug Shulman said in a statement. "We will do everything we can to minimize the impact of recent tax law changes on other taxpayers."

Also, the IRS has started regulating the tax-preparation industry. Paid tax preparers must now register with the IRS and receive a preparer tax identification number.

They can sign up by going to www.IRS.gov/taxpros. This does not affect individuals who fill out their own tax forms.

Filing a tax return is one of the biggest financial dealings people have every year, and they should not have to worry about the preparer not being legitimate, Hanson said.

"Hopefully, this will give taxpayers peace of mind that the tax preparer is registered with the IRS and is professional," he said.

About two-thirds of taxpayers traditionally get a refund, Hanson said. The rest usually have to pay and often are the last to file.

This year, procrastinators will have three extra days to prepare and file their taxes.

That's because the District of Columbia recognizes Emancipation Day, which this year falls on April 15, and it affects tax deadlines in the same way that federal holidays do. So taxpayers will have until April 18 to get their financial documents in order.

The IRS expects to receive more than 140 million individual tax returns this year, with most of those being filed by the April 18 deadline. Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns.

Here are some of the deductions taxpayers could qualify for:

Energy: Homeowners can deduct up to 30 percent of the costs paid or incurred in 2010 for any qualified energy-efficiency improvement. The credit is limited to a total of $1,500. If you claimed part of it in 2009, you can take only the remainder on your 2010 taxes.

College: The American Opportunity Credit allows for up to $2,500 per student. The credit includes books, which did not qualify for deductions in the past. The credit counts all of the taxpayer's first $2,000 spent and 25 of the next $2,000 spent.

Homes: First-time home buyers who bought a house by April 30 and closed on it by Sept. 30 last year are eligible for a credit of up to $8,000. If you claimed the credit on your 2009 form, you can't claim it again.

Electric vehicles: Taxpayers who bought plug-in electric vehicles in 2010 are eligible for a credit of 10 percent of the vehicle's cost or no more than $2,500 per vehicle. Also, those who bought qualifying hybrid cars can claim a deduction as well.

Earned Income Tax Credit: The American Recovery and Reinvestment Act provides a temporary increase in the earned income tax credit for taxpayers with three or more qualifying children. The maximum credit is $5,657 for taxpayers who earned less than $49,000 last year. The credit started in 2009 and is good for 2010 as well.

Standard deductions: The IRS increased its standard deductions in 2009, and they will remain in place for 2010 returns. The exception is for heads of households, whose $8,400 deduction is up $50 from 2009.

Here's what most preparation services suggest you bring to an appointment:

--Prior tax return.

--Photo identification.

--Social Security cards for all people claimed on the return.

--Income statements.

--Child-care information with the provider's Social Security number or tax identification number.

--Proof of bank account for direct deposit or debit.

Tuesday, January 18, 2011

2011 Tax Filing Season Gets Under Way With Many Changes

The IRS started accepting e-filed and Free File returns on Jan. 14, marking the official start of the 2011 tax filing season. However, many taxpayers will not be able to file until some time in February while the IRS updates forms and reprograms its systems to account for legislative changes made late in 2010.

Individual taxpayers will have until April 18 to file their returns. Although the normal deadline, April 15, falls on a Friday, that day is a legal holiday in the District of Columbia, and because D.C. holidays affect tax deadlines in the same way federal holidays do, all taxpayers are being given an extra three days to file their returns.

The IRS has announced that taxpayers who itemize deductions on Schedule A, as well as those who take certain recently extended deductions, will not be able to file their returns until mid- to late February. See “Tax Law Changes Will Delay Start of Filing Season for Some Taxpayers.”

For the 2011 filing season, the IRS is again making available its online “Where’s My Refund?” tool, which can be found on the front page of its website.


For paid tax return preparers, perhaps the biggest procedural change this tax season is that they must obtain and use a preparer tax identification number (PTIN) when preparing returns. The IRS has launched an online PTIN registration site where preparers can obtain or renew their PTIN. PTIN registration costs $64.25. Preparers can also apply using a paper Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application.

Generally, on any tax return or claim for refund, the preparer—whether signing or nonsigning—must provide his or her PTIN. However, the IRS recently provided a list of 28 forms or series of forms that are not subject to the PTIN requirement—for a list, see “IRS Exempts CPA-Supervised Nonsigners From New Preparer Rules.”

Many CPAs have reported problems with the PTIN registration process, both online and using the paper form. See “PTINs a Pain for Some CPAs.”


While the vast majority of tax practitioners already e-file, this tax season marks the first year that e-filing is mandatory for individual returns. Specifically, tax return preparers who anticipate filing 100 or more federal individual or trust returns during 2011 are required to e-file them.

2010 Tax Changes

A number of pieces of legislation enacted during 2010 will affect returns filed this season, as will changes enacted in earlier years. The four biggest tax bills enacted in 2010 were the health care reform legislation (the Patient Protection and Affordable Care Act, PL 111-148, and the Health Care and Education Reconciliation Act, PL 111-152), the Small Business Jobs Act of 2010 (PL 111-240), and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act, PL 111-312).

Changes Affecting Individual Returns

Itemized deductions and personal exemptions: The itemized deduction limitation is repealed for 2010 (and through 2012). This means that taxpayers can deduct the full amount of their itemized deductions in 2010. The personal exemption phaseout rules also do not apply in 2010 (and through 2012).

Alternative minimum tax (AMT): The 2010 Tax Relief Act included a patch of the AMT exemption amounts for 2010 and 2011. For 2010, the AMT exemption amounts are $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. The 2010 Tax Relief Act also extended (through 2011) the ability to use nonrefundable personal credits to offset AMT (under IRC § 26(a)).

First-time homebuyer credit: The IRC § 36 first-time homebuyer credit expired during 2010. It is available to eligible taxpayers who closed on their home purchase on or before Sept. 30, 2010 (under a binding contract in place before May 1, 2010). The closing date deadline was moved during the year from June 30 to Sept. 30 by the Homebuyer Assistance and Improvement Act.

Rollovers to Roth accounts: The Small Business Jobs Act allows rollovers from elective deferral plans to Roth-designated accounts. If a section 401(k) plan, 403(b) plan or governmental 457(b) plan has a qualified designated Roth contribution program, a distribution to an employee (or a surviving spouse) from an account under the plan that is not a designated Roth account is permitted to be rolled over into a designated Roth account under the plan for the individual. This provision is effective for distributions made after Sept. 27, 2010. The taxable amount of the rollover must be included in gross income (although for rollovers in 2010, the taxable amount is includible in gross income half in 2011 and half in 2012).

Extended Provisions for Individuals

A number of credits and deductions that had expired for 2010 were retroactively extended by the 2010 Tax Relief Act and are therefore available for taxpayers to claim on their 2010 returns. Those available to individuals include the $250 deduction for elementary and secondary schoolteachers for purchasing classroom supplies; the state and local sales tax deduction in lieu of a state income tax deduction; the deduction for tuition and related expenses; and allowance for tax-free distributions from individual retirement plans for charitable purposes.

For a list of extended provisions, see “Congress Resolves Many Tax Issues During Lame-Duck Session.”

Changes Affecting Business Returns

The Small Business Jobs Act introduced a number of changes that may affect 2010 business returns.

Small business stock: The act created a 100% exclusion of gain from the sale of certain small business stock under IRC § 1202. To be eligible, stock must be purchased after Sept. 27, 2010 (this provision has been extended through 2011 by the 2010 Tax Relief Act).

Section 179 expensing: The Small Business Jobs Act increased the maximum amount a taxpayer may expense under IRC § 179 to $500,000 and increased the phaseout threshold amount to $2 million for tax years beginning in 2010 and 2011.

Bonus first-year depreciation: The first-year 50% bonus depreciation available under IRC § 168(k) was extended for one year by the Small Business Jobs Act to apply to property acquired and placed in service in 2010 (or 2011 for certain long-lived and transportation property). This amount was then increased by the 2010 Tax Relief Act to 100% for business property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012 (or before Jan. 1, 2013, in the case of certain property).

Business credits: The carryback period for eligible small business credits under IRC § 38 was extended from one to five years. The Small Business Jobs Act also allows taxpayers to use eligible small business credits to offset both regular and alternative minimum tax liability. Both provisions are effective for credits determined in the taxpayer’s first tax year beginning after 2009.

Self-employed individuals’ health insurance: The Small Business Jobs Act allows self-employed individuals who deduct the cost of health insurance for themselves and their spouses, dependents, and children who have not attained age 27 as of the end of the tax year to take the deduction into account in calculating net earnings from self-employment for purposes of SECA taxes. This provision applies to the taxpayer’s first tax year beginning after 2009.

Startup expenses: The Small Business Jobs Act increased the IRC § 195 deduction for trade or business startup expenses from $5,000 to $10,000 for tax years beginning in 2010. The start of the limitation on the deduction is increased from $50,000 to $60,000. So for 2010 the amount of the deduction is the lesser of: (1) the amount of the startup expenses or (2) $10,000, reduced (but not below zero) by the amount by which the startup expenditures exceed $60,000.

Cell phones: The Small Business Jobs Act removed cell phones from the definition of listed property. Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property under IRC § 280A will no longer apply to cell phones.

Extended Provisions for Businesses

A number of business credits and deductions that had expired for 2010 were retroactively extended by the 2010 Tax Relief Act and are therefore available for taxpayers to claim on their 2010 returns. These include the credit for research and development expenditures and various empowerment zone designations and renewal community tax incentives.

Tuesday, January 11, 2011

What Your Clients Are Hiding From You. How to keep your clients from going to your competition.

You will be speaking with all your clients in the coming weeks. Toward the end of the conversation, ask, “What’s one question (about taxes or money) that you’re not sure if it’s worth asking?” It’s thoughtful for you to ask and that in itself is a plus.

If the answer to your client’s question is long, complicated or you’re not sure of the answer, tell them you’d like to do some research and then will e-mail them the answer.

You’ve now created new articles for your blog, newsletter or LinkedIn posts. More importantly, you’ve made your client feel more comfortable asking you questions.

In today’s economic conditions, many of your clients have questions that they aren’t bringing up to you. Perhaps, they don’t know if you’re the right person to ask. If their concerns go unvoiced, these can end up becoming growing problems. If you don’t know what’s on their mind, you can’t help them, which in turn can lead to missed opportunities for your clients and your practice.

Many of your clients’ questions are about their own financial affairs … missteps, forks in the road or how they compare with others. As a CPA for many businesses and individuals, you have a wider angle than any one client. Sharing your wide-angle expertise is truly your value, over and above punching in the right numbers.

Some of your clients’ concerns may have to do with the federal income and estate tax changes. Politics aside, you can have frank conversations about how the changes (may) impact a variety of individual and business scenarios. It is a great segue to schedule a planning and advisory session.

The CPA who speaks about such issues at seminars, in newsletters, blogs and LinkedIn groups may lure them away. Moreover, when you proactively address your clients concerns, it engenders greater loyalty, possibly more business from them and often more referrals to others. Your private, one-on-one conversations with clients are truly the greatest form of marketing.

The second best marketing tactic is communicating with your clients, colleagues and other contacts regularly and consistently. The questions you pull out from any one of your clients give you the content for your blog, newsletter and LinkedIn updates. Remember what our grade school teachers told us? “Don’t be afraid to ask questions. If you have a question, most likely others do too.” Likewise, your client’s concerns represent the many unvoiced.

Your clients don’t want to sound stupid or waste your time. If you are one of the exceptional accountants who review your client’s financials and tax returns with them, ask them what they understand and what they’d like clarified. While this takes more time, it takes a lot less time than acquiring a new client. It also allows you ask your clients how much time their colleagues’ CPAs spend with them to go over such matters, and remind them that should their friends, family or colleagues need added clarification, you are more than happy to help.

These simple Q&A sessions are great training opportunities for your staff accountants. By including them with your clients, you are introducing your clients to your legacy. Moreover, your associates will learn the art of client service, over and above the skill of accounting. Over time, you can trust your staff to conduct such sessions on their own.

As you may have already realized, the world of blogging, newsletters, LinkedIn, client service and personal attention, are all one and the same. They should work together, feed off each other and be opportunities to help your clients, your staff and your practice. If you feel it’s awkward to ask your client’s questions, think how difficult it is for them to ask you.

You’re the most knowledgeable financial expert they know. Your clients trust you with their money matters. To not ask for questions is to do your clients and your firm’s marketing a disservice. Enjoy the conversations and turn them into your next blog articles, newsletters and LinkedIn posts.

Tuesday, January 4, 2011

IRS Says Tax Changes Will Cause Some Filing Delays

If you are a college student, teacher or resident of a state that has sales taxes but no income tax, the bipartisan tax agreement this month could mean significant benefits next year. And the IRS is adjusting its computers to take in your requests.


That means it will take a little longer for some taxpayers to file their 2010 returns, as the Internal Revenue Service reprograms computers for new college tuition breaks, teachers who buy classroom supplies with their own money, and Americans who live where there's no state and local income tax to deduct.

The IRS said Thursday that it will be mid- to late February before it can accept returns that apply for those tax breaks. However, delays will be minimal for taxpayers who already itemize deductions, because they normally have to wait for their financial documents.

"The majority of taxpayers will be able to fill out their tax returns and file them as they normally do," IRS Commissioner Doug Shulman said. "We will do everything we can to minimize the impact of recent tax law changes on other taxpayers. The IRS will work through the holidays and into the new year to get our systems reprogrammed and ensure taxpayers have a smooth tax season."

The IRS will announce a specific date when it can start processing tax returns affected by the changes.

The changes in the law that will cause delays:

-The new line on Schedule A, Itemized deductions, to allow for state and local sales tax deductions. Taxpayers in states with income taxes usually chose that deduction instead. Taxpayers cannot complete Schedule A until this tax break is programmed in IRS computers.

-The new higher education tuition and fees deduction for parents and students, covering up to $4,000 paid to a post-secondary institution. Many parents and students, however, will instead use existing education credits.

-The new expense deduction for kindergarten-through-grade 12 educators who have out-of-pocket classroom expenses of up to $250.

The new tax law gives benefits ranging from tax cuts for millionaires and the middle class to longer-term help for the jobless.

Without the law, millions of Americans would have been hit with increases starting on New Year's Day.

The package retains Bush-era tax rates for all taxpayers, including the wealthiest Americans, a provision President Barack Obama and congressional liberals opposed. It also offers 13 months of extended benefits to the unemployed and attempts to stimulate the economy with a Social Security payroll tax cut for all workers.

Meanwhile, a board that reviews IRS operations said examinations of returns increased by 8 percent this year on taxpayers with incomes above $1 million.

Examinations of individuals with incomes below $1 million, small and large corporations, and collections, remained steady from last year. The rate of returns filed electronically rose slightly to 69 percent, while revenue from enforcement action was up from $48.9 billion in 2009 to $57.6 billion this year.

The IRS Oversight Board, which consists of nine members, was created by Congress under a 1998 law to oversee the agency's operations.