Key Provisions Of H.R. 8: American Taxpayer Relief Act Of 2012
from Alex Chalekian, GEPC
Summary:
The 112th Congress was recently dubbed the "Do Nothing Congress" for the minimal amount of legislation enacted during the two-year session. Two hours after going over the Fiscal Cliff at midnight on January 1, the Senate voted 89-8, and the House of Representatives voted 257-167 to pass the American Taxpayer Relief Act of 2012 to reverse some of the measures which may have had a severe negative impact upon the economy.
The Congressional Budget Office projects the legislation will add $4 trillion to the U.S. deficit over the next 10 years compared to a scenario where the Bush tax cuts had been allowed to expire.
The Senate bill also sets up what is likely to be an even more heated fight in late February when the Treasury Department must come to Congress to seek an increase in the government's borrowing limit.
Key Provisions:
Tax rates will be allowed to rise on individual incomes over $400,000 per year, and household incomes over $450,000 per year to a maximum rate of 39.6%.
The tax on estates would rise to a 40% maximum rate, with a permanent exemption of $5 million, indexed for inflation.
Permanently sets maximum long-term capital gain and dividend tax rates at 20% for households making more than $450,000.
Phases out itemized deductions and personal exemptions for those making more than $250,000, $300,000 joint.
Permanently sets maximum long-term capital gain and dividend tax rates at 15% for households making less than $450,000.
The 2% temporary decrease in FICA payroll taxes relief was allowed to expire. This provision has a disproportionate impact on those making less than $113,700 (the FICA limit in 2013). This is expected to take $125 billion out of consumer income.
Extends the tuition tax credit and child and dependent care tax credits for five years.
Workers will be allowed to rollover 401k funds to a Roth IRA while still actively participating in a 401k plan. Think of it as an 'In-Service' distribution.
- Pay income tax currently.
- Not subject to Required Minimum Distributions at age 70½.
- Future earnings are tax-free.
Permanent adoption of the Alternative Minimum Tax exemption amounts. Impacts 32 million Americans who may have been subjected to AMT in 2012 and indexes AMT for inflation.
Postpones $109 billion sequester for two months.
Extends unemployment insurance for two million long-term unemployed Americans.
Extension of the 2008 Farm Bill through the end of this fiscal year (September 30, 2013). Keeps the price of milk from potentially doubling.
Prevents a 27% reduction in Medicare payments to doctors and other health care providers treating patients on Medicare.
Why It's Worth Paying for a Tax Pro
reprinted from the Wall Street Journal
To save money last year, Anthony Fasano tried preparing his new business's first tax return on his own. Then reality sank in.
"I realized I really had no understanding of the tax laws from a business standpoint," says Mr. Fasano, founder of Powerful Purpose Associates, an executive-coaching company he runs out of his home in Ridgewood, N.J. "I was just winging it."
Mr. Fasano started the business in 2009 as a side project while working for an engineering firm. But when his wife got laid off from a government job last year, he turned it into a full-time endeavor, sensing it would prove more lucrative for his family.
After spending roughly 20 hours trying to figure out the returns, Mr. Fasano ended up paying $500 to have an accountant finish the job, at which point he learned that he had overlooked the need to file 1099 forms for his four contract employees. "I didn't know that had to be done at all," says Mr. Fasano. "I should've gone to an accountant in the beginning."
This tax season, entrepreneurs operating on a tight budget may be tempted to forgo professional help in preparing their companies' returns. But experts say the investment is typically worthwhile -- at least for those just starting out -- to maximize deductions and avoid penalties. Tax specialists can help ensure that business owners don't pay Uncle Sam too much or too little and help identify all the tax breaks they're eligible to receive.
This year, the filing deadline for most corporate entities is March 15. For sole proprietorships and partnerships, the deadline is April 18. Limited liability companies must choose to file as a corporation or as either a sole proprietorship or partnership.
Business tax returns are undoubtedly complex. They include a vast number of rules and options that frequently change. For example, the recently enacted federal health-care law includes a new, temporary tax credit for small businesses that cover at least 50% of the cost of health insurance for some employees, among other qualifications.
"Most people can do the tax return themselves, but it is a hassle," says Mr. Hall. "It's about how much you want to spend on Advil for the headaches you're going to get."
Lana Goldenberg says she lost out on roughly $1,000 last year by inadvertently misclassifying certain deductions when preparing her start-up's first tax return. "It's not a huge amount of money," she says, "but for a small business it matters."
Ms. Goldenberg launched her marketing consultancy out of her home in Marina del Rey, Calif., after getting laid off from a job in the same field in 2008. For her 2010 tax return, she says she's hired an accountant for about $300.
There are a number of deduction options that entrepreneurs may not be aware of. For example, if you've been running your business out of your home, you can deduct a percentage of your rent or mortgage interest, utility bills and repairs, says Cathy B. Goldsticker, a tax partner at accounting firm Brown Smith Wallace in St. Louis, Mo.
If you've been using your personal vehicle for your business, you can deduct however much you spent on gas, maintenance and tolls for this purpose. "Just make sure you have the records to show they're truly business-related deductions," Ms. Goldsticker says.
One tax break in particular that entrepreneurs won't want to miss: the ability to deduct up to $10,000 in start-up expenses when filing a business's first tax return. These include items or services purchased "prior to actually opening your doors," such as software for writing up a business plan, says Scott Berger, a principal at accounting firm Kaufman Rossin & Co. in Boca Raton, Fla.
But entrepreneurs may not realize that not every resource purchased to get a business up and running qualifies as a start-up expense. For example, the Internal Revenue Service doesn't consider computers, office furniture, machinery and other assets that last more than one year as such, says Mr. Berger. (However, many of these items can still be fully deducted either over the course of their lifetime in small amounts or, for 2010 returns, in one fell swoop if they meet certain qualifications.)
Oren Salomon says he regrets preparing his start-up's first tax return on his own this year to save money because he grossly underestimated how much time and energy the job would take. "The process has been very arduous and confusing," he says. "So far I've spent at least 25 hours and I'm maybe halfway done."
Mr. Salomon co-owns Mozign, a Dallas designer and developer of smartphone applications. He started the business with a friend last year after graduating from the University of California, Berkeley, because he wasn't able to land a job.
Next year, Mr. Salomon says he plans to hire an accountant. "It will be totally worth the money," he says. "I'd rather be working on product and spending my weekends with my girlfriend."
Mistakes happen when doing tax returns. But for many taxpayers, discovering a mistake leads to an inevitable question: What do you do now? Do you file an amended return? Or do you wait until next year to let the government know about an item that fell through the cracks?
The consensus advice: Don't let an error slide. The odds of getting caught have increased, thanks to the sophistication of the IRS's electronic systems. Put your head in the sand, and "sooner or later the government is going to catch up with you," says James Guarino, a partner at MFA - Moody, Famiglietti & Andronico LLP, a Boston-area accounting and consulting firm.
An Internal Revenue Service spokesperson says the agency may correct math errors and accept returns with certain forms or schedules left out. Don't file an amended return in the case of a math error that doesn't change the amount you owe, the agency says. Do file an amended return if the original filing status, income, deductions or credits were incorrect.
Failure to correct one of these types of errors is likely to lead the government to re-examine the whole return—and possibly conduct an audit. Penalties are often applied when an error leads to underreporting of tax owed.
Penalties Galore
Generally, there's a penalty for each month when tax remains unpaid, says Melissa Labant, a technical manager at the American Institute of Certified Public Accountants. There can also be more penalties for big understatements or underpayments of estimated income tax.
The bright side is that the IRS may waive a penalty if a taxpayer can prove there was a reasonable cause for the error, and that it wasn't willful neglect, Ms. Labant says.
In preparing an amended return, be thorough. The more information provided to the IRS about the corrected item, the less chance there is that the agency will decide to do an audit.
Give the Full Story
Form 1040X, the amended return form, includes a narrative section. Taxpayers often make the mistake of simply jotting down a sentence fragment like, "to correct my mortgage interest deduction." Instead, put down what caused the error and give as full a story as possible.
The idea, says Mr. Guarino, is to make the IRS's job as easy as possible so that nobody has to do "any heavy lifting to see if the amended return is legitimate."
Taxpayers often drop the ball on the state return. Anyone who corrects an error on a federal return and does not check to see whether a fix is also needed for the state is asking for trouble in the form of a possible penalty. Federal and state tax authorities trade information closely and pick up a lot of errors this way.
Karen M. Lydon, a certified public accountant at Raphael and Raphael LLP in Boston, says her firm works with a lot of people who need to amend forms after making errors doing returns themselves with various tax-software programs.
Depreciated rental property is a common source of trouble, as are investments in hedge funds.
Dividends can be a problem, too. A financial institution may report on a Form 1099 that a dividend is ordinary, due to a lack of information provided by the payer by the reporting deadline. Later, an amended Form 1099 may be issued to change the ordinary dividend to a qualifying one, which will be taxed at a lower rate.
Are Cash earnings are non-taxable? Enrolled agents discuss most common taxpayer misconceptions
reprinted from accounting web
A recent informal poll of Enrolled Agents (federally-licensed tax practitioners like Michael Marshall, The Tax Rabbi ), revealed many common misconceptions among taxpayers. Included on the list were:
"I had a really big loss in the stock market this year, so I won't owe any income taxes." Deduction of capital losses against ordinary income is limited to $3,000. Also incorrect: "I traded some stocks and have a loss/didn't make any money, so there's no need to report those sales."
"They paid me in cash and I don't have to report that, right?" If it's income, you must report it.
"I'm too young/too old to have to pay taxes." Even your dependent high schooler has to file a return after earning income over $5,700. And, Uncle Sam may still be interested in your return after you're dead. A personal representative of the decedent is required to file a tax return and the estate tax when due.
"If I didn't receive a document about it, it's not taxable." A good preparer will provide you with a checklist that reveals missing documents, but too often taxpayers who are preparing their own returns or dealing with an unlicensed preparer will fail to include important information simply because they missed something in the mail, or because the document was never mailed.
"Income earned in a foreign country is not taxable." Taxpayers are required to report all earned income to IRS, no matter where it was earned.
"You don't have to report gambling income, and besides, I lost." Gambling losses do not net out against income. For the non-professional gambler, income goes on page one of Form 1040; the losses go on Schedule A and are not subject to the 2 percent floor, but cannot be greater than the winnings. Therefore, the "net" sheets many casinos provide individual taxpayers are worthless.
"Income from my hobby can't be taxable." The operative word here is "income." It's taxable.
One of this year's widest-spread misconceptions came in the wake of the IRS announcement that employers must now report medical insurance paid for employees. Duped by a viral e-mail, taxpayers across the country mistakenly believe that medical insurance must now be reported as income and taxed. Not true. The expense will be reported on the W-2, and not added to income.
Finally, a lot of taxpayers hold misconceptions regarding paid preparers. The notion that all tax preparers do is fill out forms neglects the real value of a paid preparer: They keep up with myriad tax laws and regulations and have the expertise to know how to apply these rules for the benefit of the taxpayer. And, no matter who prepares the tax return, the taxpayer is the one who is legally responsible for whatever appears on his or her return, making it a doubly good idea to hire a licensed preparer.
