Tax Changes Effective On 2012 Income Tax Returns. Greta P Hicks, CPA

Transcription

1 Tax Changes Effective On 2012 Income Tax Returns Greta P Hicks, CPA 1

2 GRETA P HICKS, CPA - BIO Former IRS Revenue Agent and IRS Manager Examination Division Represents taxpayers before the IRS Provides technical support and research as consultant to other tax professionals and corporate tax departments Develop and/or present tax updates and IRS procedure seminars: Live seminars, webinars, and self-study For professional societies, commercial CPE providers, and educational institutions such as Thomson-Reuters, Texas A&M Agricultural Extension Service, University of Texas Permian Basin, California CPA Education Foundation, Foxmoor Education Services, Continuing Professional Education, Inc., Progressive Business Conferences Greta answers the critical question, What to do if I m audited by the IRS? 2

3 OVERVIEW Filing Status, Exemption, and Tax Rate changes Income The latest on what is and is not taxable Schedule A Sales taxes, charitable contributions, and miscellaneous itemized deductions Schedule C Changes & IRS Audit Issues Schedule D Form 1099B Schedule E Current IRS Audit Issues Schedule F Current farm/ranch issues 3

4 FILING STATUS 4

5 HEAD OF HOUSEHOLD An unmarried taxpayer may qualify as a head of household by maintaining as his or her home a household that is the principal place of abode for more than half the year of: a qualifying child of the taxpayer or a person who would be the taxpayer's qualifying child if the taxpayer hadn't released the dependency deduction to the noncustodial parent. NOTE: The taxpayer will not qualify as a head of household if the qualifying child is married at the close of the taxpayer's tax year. Code Sec. 2(b) 5

6 MARRIED INDIVIDUALS LIVING APART A married taxpayer is considered single for tax purposes and can Head of Household Rates, if he or she meets all of the following tests: 1. Files a separate return. 2. Maintains as his or her home a household that for more than half the tax year is the principal place of abode of a son, daughter, stepson or stepdaughter for whom taxpayer is entitled to a dependency exemption even if the taxpayer allows the other parent to claim the exemption for the child. Furnishes more than half the cost of maintaining the household. 3. Doesn't have the other spouse living with him or her during the last six months of the tax year. Either or both spouses can qualify as unmarried taxpayers by meeting the tests. If one spouse qualifies and the other doesn't, the spouse who doesn't must use married-filing-separately rates. Code Sec. 7703(b) 6

7 QUALIFYING WIDOW(ER) A surviving spouse whose spouse died during either of the surviving spouse's two tax years immediately preceding the current tax year may qualify to be taxed at joint return rates. Joint return rates are available if the qualifying widow(er): Hasn't remarried at any time before the close of the tax year X Maintains (pays more than 50% of the costs of) a home which is the principal place of abode of a son or daughter (including adopted and foster children) or a stepson or stepdaughter, Is entitled to a dependency exemption for at least one child Was entitled to file a joint return with the deceased spouse for the year of death. Code Sec. 1(a) & Code Sec. 2(a) 7

8 INCOME 8

9 DECEDENT'S RETURN A final income tax return must be filed for a deceased person who would be required to file if alive, for the part of the year up to the date of death. A decedent's final return is filed by the person entrusted with his property. A decedent's last tax year ends on his death. After-death income and deductions in respect of a decedent must be reported by decedent's estate or others who acquire his rights or obligations. 9

10 QUESTION Wife 1 died May 2, 2012 Married Wife 2 on Dec 27, 2012 Wife 1 MFS with her community half of income / deductions Taxpayer & Wife 2 filed MFJ with his community half until May 2, all his income balance of year and all of Wife 2 income for 12 months Can taxpayer file MFJ with Wife 1 in 2012 if married Wife 2 on Jan 2, 2013? 10

11 COMMUNITY PROPERTY SPLIT GENERALLY WHEN SPOUSES IN COMMUNITY STATE FILE SEPARATELY, INCOME & DEDUCTIONS ARE ADDED TOGETHER AND DIVIDED IN HALF. EXCEPTIONS, IRS Pub You and your spouse lived apart all year. 2. You and your spouse did not file a joint return for a tax year beginning or ending in the calendar year 3. You and/or your spouse had earned income for the calendar year that is community income. 4. You and your spouse have not transferred, directly indirectly, any of the earned income in condition (3) above between yourselves before the end year. Do not take into account transfers satisfying child support obligations or transfers of very small amounts or value. 11

12 DUE DILIGENCE SCH B Schedule B, FBAR Questions Form TD F Report of Foreign Bank and Financial Accounts Preparation of Form 8938, Statement of Specified Foreign Financial Assets 12

13 DIVIDENDS Dividends received after 2002 are taxed to noncorporate shareholders at the rates that apply to net capital gain RATES Qualified dividend income. (Code Sec. 1(h)(11)): 0% for dividends falling below the 25% bracket 15% for all other dividends; 2010 Tax Relief Act (P.L ) extended the capital gain taxation for qualified dividends through

14 DAMAGES Damages received for personal physical injury or personal physical sickness are excluded from income Punitive damages generally are taxable, regardless of the nature of the claim. Interest on both types of damages is taxable. Code Sec. 104(a)(2) 14

15 DISCHARGE OF INDEBTEDNESS Reduction or cancellation of debt (COD) (recourse or nonrecourse) is income to the debtor. (Code Sec. 61(a)(12)) UNLESS Debtor is Insolvent: Discharge is excluded from the debtor's gross income up to the amount of the insolvency. Debtor in Bankruptcy: Not included in debtor s gross income. Code Sec. 108(a) 15

16 Form 982 Allocation of COD Pub 908, Bankruptcy Tax Guide IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) NOTE: The exclusion for discharge of indebtedness of a qualified individual because of Midwestern disasters does not apply to discharges after

17 PERSONAL RESIDENCE DISCHARGE OF INDEBTEDNESS A special mortgage forgiveness exclusion applies to discharges after December 31, 2006 and before January 1, 2013.* Up to $2 million of acquisition indebtedness *2008 Economic Stabilization Act extended to debt discharged before January 1, Code Sec. 108(e)(1)(E) 17

18 EMPLOYEE BENEFITS Health Care Insurance Traditionally, the exclusions from gross income for employerprovided accident and health coverage and medical expense reimbursements have applied only to qualifying child and qualifying relative dependents as defined in Code Section 152. (i.e., children under age 19 or children under age 24 who are full-time students and other individuals who meet gross income and support tests). UPDATE: The 2010 Health Care requires health plans that provide dependent coverage to make that coverage available to an employee's adult child until the child reaches age 26. (Code Sec. 9815). A corresponding change extends the exclusion for reimbursements for medical care to any child who has not reached age 27 as of the end of the tax year. (Code Sec. 105(b)) 18

19 EMPLOYEE BENEFITS Dependent Care Assistance CANNOT exceed the employee's earned income or, For married employees, the earned income of the lower earning spouse. The aggregate exclusion is further limited to $5,000 ($2,500 for a married individual filing separately). Code Sec

20 EMPLOYEE BENEFITS Education Assistance For tax years beginning before Jan. 1, 2013 The maximum amount of educational assistance that an employee can receive tax free under an educational assistance plan during any calendar year is $5,250. The exclusion for employer-provided educational assistance is scheduled to expire for tax years beginning after Code Sec. 127(a)(1) 20

21 EMPLOYEE BENEFITS Adoption Assistance For 2012, the maximum exclusion for employer-provided adoption assistance is $12,650 per child (for both non-special needs and special needs adoptions). For tax years beginning in 2012, the phase-out range is be $189,710 to $229,710. UPDATE: Scheduled to expire for tax years beginning after December 31, Code Sec

22 EMPLOYEE FRINGE BENEFITS Qualified Transportation Fringe For 2012, the monthly limit for employer provided parking is $240 and $245 for The monthly limit for transit and/or vanpool benefits is $125 for 2012 and Maximum annual exclusion is equal to $20 multiplied by the number of the employee's qualified bicycle commuting months for the year. Code Sec. 132(f) 22

23 SCHEDULE D 23

24 SCH D WHAT S NEW FORM 1099-B Sales Price Basis SCHEDULE D Losses with/without Basis on 1099 Gains with/without Basis on 1099 FORM 8949, Sales and other Dispositions of Capital Assets 24

25 CAPITAL GAIN RATES Adjusted net capital gain is taxed at a maximum rate of 15%. ** If the adjusted net capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it is taxed at a 0% rate.** Collectibles gain and section 1202 gain is taxed at a maximum rate of 28%. Unrecaptured section 1250 gain is taxed at a maximum rate of 25%. **Set to expire. Code Sec. 1(h) 25

26 INSTALLMENT SALES REMINDER Gross profit is the selling price less the property's adjusted basis. Interest is NOT part of the selling price. Gain recaptured under Code Sec or Code Sec is fully taxed as ordinary income in the year of sale. NOTE: Only the gain that isn't recapture income is taken into account under the instalment method. 26

27 LIKE-KIND EXCHANGES Code Sec Nonrecognition for like-kind exchanges isn't elected. It's mandatory if the conditions are met. No gain or loss is recognized where business or investment property is exchanged solely for likekind property. If a taxpayer receives boot money or any other property that doesn't qualify for nonrecognition of gain. Liabilities assumed are treated as a cash equivalent (boot). 27

28 INVOLUNTARY CONVERSIONS Code Sec No gain is recognized when property is compulsorily or involuntarily converted into property similar or related in service or use. EXAMPLE: Sale or exchange of livestock (in excess of the number taxpayer would sell) solely on account of drought, flood, or other weatherrelated conditions. (Code Sec. 1033(e)) Replacement property must be substantially similar to the use of the replaced property. NOTE: Some provisions of Sec differ in Presidentially Declared Disaster Area. 28

29 REPLACEMENT PERIOD Code Sec Beginning with (1) the date the property was destroyed, stolen, condemned, etc., or (2) the date condemnation or requisition was first threatened or became imminent, whichever is earlier, (Code Sec. 1033(a)(2)(B)) and Ending (1) two years after the close of the first tax year in which any part of the gain is realized three years in the case of condemnation or threat of condemnation of certain real property; four years for principal residences converted due to presidentially declared disasters, or (2) at a later date allowed by IRS upon application by the taxpayer. 29

30 BUSINESS INCOME / EXPENSES 30

31 DUE DILIGENCE SCH C Does a tax return preparer have an obligation to make inquiries of a taxpayer? Yes. Examples: Must make general inquiries or have existing knowledge of the taxpayer's sources of income, such as whether or not the taxpayer received alimony, a refund of state taxes in the previous year, or received interest or dividends, and for Schedule C taxpayers, a more in-depth discussion to include what accounting method the taxpayer uses. Copies of previous year s tax return or copies of depreciation schedules for Schedule C or E taxpayers or stock basis for Schedule D taxpayers. Some provisions of the Internal Revenue Code or regulations require that specific facts and circumstances exist (for example, that the taxpayer maintains specific documents) before a deduction or credit may be claimed. Preparation of Forms

32 DUE DILIGENCE SCH C Examples: Auto Business Use, 2012 Standard Mileage Rate: 55.5 cents per business mile Code Sec 274 and I.T. Regs., Travel & Entertainment Form 8300, Report of Cash Payments Over $10,000 Received In a Trade or Business Preparation of Forms

33 HEALTH INSURANCE PREMIUMS A self-employed individual can deduct as a business expense 100% of the amount paid during the tax year for medical insurance on himself, his spouse and his dependents. No deduction is allowed to the extent the deduction exceeds the individual's net earnings from self-employment derived from the business for which the plan providing the coverage is established. NOTE: Per the Small Business Jobs Act of 2010, for a tax year beginning after December 31, 2009, but before January 1, 2011, the deduction for health insurance costs of a self-employed taxpayer (and his or her family) under IRC Sec. 162(l) was allowed in computing net earnings from self-employment. 33

34 NEW REGS. TANGIBLE PROPERTY Capitalization of Amounts Paid To Repair, Improve, or Rehabilitate Tangible Property Clarifying and expanding the current standards under 263(a) for repairs and improvements, the temporary regulations cover a broad range of other tangible property acquisition issues, including a definition of materials and supplies, and a De minimis capitalization threshold Election To Deduct Materials and Supplies Under the De minimis Rule, Five categories of materials and supplies can now be expensed under this De minimis expensing rule 34

35 Capitalization of Amounts Paid To Repair, Improve, or Rehabilitate Tangible Property, EXAMPLES: Amounts Paid To Acquire or Produce Tangible Property Under 1.263(a)-2T Amounts To Improve Property Under 1.263(a)-3T Under the new rules, the improvement standards have to be applied to the major systems within a building or the major components, rather than the entire building. EXAMPLES: Apply the improvement standards to either the heating and air conditioning system, the plumbing system, the electrical system, escalators, elevators, etc., rather than applying them to the entire building If you replace the roof on a building and dispose of the old roof, you now have the option to allocate basis and take a retirement loss for the old roof. 35

36 SCHEDULE E - RENTALS 36

37 VACATION HOME LIMITATIONS Publication 527 What's New Qualified joint ventures reporting rental real estate income. Beginning in 2011, qualified joint ventures reporting rental real estate income not subject to selfemployment tax must report that income on Schedule E instead of Schedule C. See the Instructions for Schedule E (Form 1040). Special depreciation allowance. For qualified property acquired after December 31, 2010, and placed in service before January 1, 2013, the additional first year depreciation is 100% of the depreciable basis of the property instead of 50%. See Publication 946, How To Depreciate Property, for more information. 37

38 VACATION HOME LIMITATIONS GENERAL RULES If you or your family members have lived in the home for more than the greater of 14 days, Or, 10 percent of the days it is rented out to others during the year; and If your rental expenses are greater than your rental income for the year, Expenses are limited to income. 38

39 VACATION HOME LIMITATIONS QUESTIONS TO ASK Did you use the dwelling unit as a home this year? Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? 39

40 VACATION HOME LIMITATIONS CHECK LIST A. Total days available for rent at fair rental price B. Total days available for rent C. Total days of rental use. D. Total days of personal use (including days rented at less than fair rental price) E. Total days of rental and personal use. F. Percentage of expenses allowed for rental. 40

41 CONVERSION OF VACATION HOME INTO PRINCIPAL RESIDENCE Sale of personal residence exclusion will not apply to the extent that it relates to the nonqualified use period of the residence Nonqualified use period is any period, other than the portion of the period before January 1, 2009, that the property is not used as the principal residence of the taxpayer or spouse. Nonqualified use does not include any portion of the fiveyear period which is after the last date that the property is used as the principal residence of the taxpayer or spouse. (Code Sec. 121(b)(4), Housing Rescue and Foreclosure Prevention Act of 2008) 41

42 PASSIVE ACTIVITY LOSS LIMITATIONS Rental activities are generally passive activities (Code Sec. 469(c)(2)) without regard to material participation. (Code Sec. 469(c)(4)) EXCEPTIONS: 1. Passive Participation Residential Rental Real Estate 2. Material Participation - Real Estate Professionals 42

43 PASSIVE ACTIVITY LOSS LIMITATIONS Code Sec. 469 An individual who has at least a 10% interest in any rental real estate activity and actively participates in that activity. May offset up to $25,000 of nonpassive income with that portion of the passive activity loss, or of the deduction equivalent of the passive activity credit. Under a phase-out rule, the $25,000 ceiling is reduced by 50% of the excess of taxpayer's AGI above $100,

44 PASSIVE ACTIVITY LOSS LIMITATIONS Real Estate Professional For any tax year in which an individual qualifies, the rule treating all rental activities as passive activities doesn't apply. (Code Sec. 469(c)(7)(A)(i)) The qualifying taxpayer's rental real estate activity is not a passive activity if the taxpayer materially participates in it. (Reg (e)(1)) NOTE: Qualifying individuals who materially participate in a rental real estate activity may use losses or credits from the activity to offset other, non-passive income. 44

45 SCHEDULE F FARM DISASTER LOSSES Occasionally farm and ranch operators suffer a loss of property due to an unforeseen event such as an accident, storm, flood, drought, or fire. [IRC Section 1033(a)] EXAMPLES: Pickups, tractors, machinery and breeding livestock and dairy cattle EXAMPLE: A farmer might deduct a loss from a drought disaster, even though loss from drought is ordinarily not deductible as a casualty loss. 45

46 SCHEDULE F - FARMING ABILITY TO DEFER LOSS IF REPLACED WITH LIKE KIND PROPERTY = Similar or related in service or use The new property must be substantially similar to the end use of the old property. EXAMPLE: A taxpayer that lost timberland property used for logging could not replace that property with a parking lot and qualify for non-recognition under Section NOTE: Congress sometimes passes special provisions related to some disasters, example: Katrina 46

47 REPLACEMENT PERIOD In cases of casualty or theft, the property must be replaced within a period of two years after the end of the first taxable year in which any part of the gain is realized. In the case of eminent domain, the property must be replaced within three years after the end of the first taxable year in which any part of the gain is realized. [IRC Section 1033]. For property losses in a Presidentially declared disaster, as opposed to a ordinary casualty, Section 1033 gives the taxpayer a two year extension on the replacement period, so the taxpayer has a total of four (4) years in which to replace the lost property. [IRC Section 1033(h)]. 47

48 FARMS/RANCHES IN PRESIDENTIALLY DECLARED DISASTER AREAS List of Disaster Areas _type_value=all&items_per_page=10 List of Special Tax Provisions for Selected Disasters Tax Law Changes Related to National Disaster Relief Tax Law Changes Related to Midwestern Disaster Areas Alabama victims of January 2012 storms Florida victims of June 2012 Tropical Storm Debby Indiana victims of February 2012 storms, Irene Hurricane Isaac Hurricane Kentucky victims of February 2012 storms Louisiana Tropical Storm Mississippi Hurricane Oklahoma victims of Freedom Wildfire that began on Aug. 3, 2012 Tennessee victims of February 2012 storms West Virginia victims of February 2012 storms West Virginia victims of June 2012 storms and straight-line winds West Virginia victims of March 2012 storms 48

49 FARM NET OPERATING LOSSES NOL: A special five-year carryback period may apply to certain farming losses. IRS Publication 547. This publication provides more detail relative to gains or losses from the destruction or theft of business property. 49

50 HOBBY LOSS RULES REGS IRC 183: Activities Not Engaged in For Profit (Audit Technique Guide) Treasury Regulations The manner in which the taxpayer carries on the activity 2. The expertise of the taxpayer or his advisors 3. The time and effort expended by the taxpayer in carrying on the activity 4. Expectation that assets used in activity may appreciate in value 5. The success of the taxpayer in carrying on other similar or dissimilar activities 6. The taxpayer's history of income or losses with respect to the activity: 7. The amount of occasional profits, if any, which are earned: 8. The financial status of the taxpayer: 9. Elements of personal pleasure or recreation 50

51 NET OPERATING LOSS An NOL for any tax year may be carried back two years and forward 20 years. A three-year carryback period applies to NOLs arising from property losses of individuals due to fire, storm, shipwreck, or other casualty, or from theft. Small businesses or a taxpayer engaged in the trade or business of farming: A three-year carryback period applies to NOLs attributable to Presidentially declared disasters. A small business is one whose average annual gross receipts are $5 million or less. (Code Sec. 172(b)(1)(F)) A special five-year carryback period may apply to certain farming losses. 51

52 NET OPERATING LOSS A taxpayer may elect not to use the carryback period and instead only carry over the NOL for the allowed carryforward period. ELECTION: Must be made on a timely filed return, included extensions. NOTE: Election cannot be made on delinquent return. Once the election is made for any tax year, it's irrevocable for that year. (Code Sec. 172(b)(3); Reg T(d)) 52

53 ADJUSTMENTS TO INCOME 53

54 IRA CONTRIBUTION LIMITS Except for rollover contributions, The maximum amount that may be contributed to IRAs for any individual for a tax year is $5,000 for Individuals who turn age 50 before the close of the tax year may increase the maximum permitted annual contribution by $1,

55 IRA CONTRIBUTION LIMITS Limit applies to an individual who is not an active participant in an employer plan during any part of the year, but whose spouse is an active plan participant. For 2012 is $173,000 and the phase-out is complete when modified AGI reaches $183,000. NOTE: The higher limit does not apply to the activeparticipant spouse. (Code Sec. 219(g)(7)) For 2013, the contribution will be phased out ratably between $178,000 and $188,000 55

56 IRA CONTRIBUTION LIMITS JOINT RETURNS will be phased out ratably for 2013 from $95,000 and $115, from $92,000 and $112,000 SINGLE FILERS & HEADS OF HOUSEHOLD 2013 from $59,000 and $69, from $58,000 and $68,000 MARRIED TAXPAYERS FILING SEPARATE RETURNS 2012 and 2013, $0 and $10,000 56

57 HIGHER EDUCATION EXPENSES For tax years beginning before January 1, 2012 eligible individuals could claim an above-the-line deduction for higher education expenses. Code Sec. 222(e) 57

58 QUALIFIED EDUCATION LOAN INTEREST Individuals may deduct a maximum of $2,500 annually for interest paid on qualified higher education loans. For 2012, the deduction is phased out ratably for taxpayers with modified adjusted gross income (AGI) SINGLE: between $60,000 and $75,000 MJF: between $125,000 and $155,000 Code Sec

59 STANDARD DEDUCTION SCHEDULE A 59

60 STANDARD DEDUCTION Filing Status 2012 Joint filers and surviving spouses $11,900 Heads of household $ 8,700 Single $ 5,950 Marrieds filing separately $ 5,950 60

61 ADDITIONAL STANDARD DEDUCTION 2012 Filing Status 2012 Married and surviving spouses $1,150 Heads of household $1,450 Single $1,450 One who is both elderly and blind is entitled to each additional standard deduction. (Code Sec. 63(c)(3)) 61

62 STANDARD DEDUCTION For 2012, the basic standard deduction of individuals who can be claimed as dependents by another taxpayer can not exceed the greater of : (a) $950 or (b) $300 plus the individual's earned income LIMIT: NOT MORE THAN $5,950. Code Sec. 63(c)(5) 62

63 STANDARD DEDUCTION $12,200 joint filers and surviving spouse $ 8,950 heads of household $ 6,100 singles $ 6,100 marrieds filing separately For dependents will be the greater of (a) $1,000 or (b) $350 plus the individual's earned income. 63

64 STANDARD DEDUCTION Additional standard deduction for Married taxpayers 65 or over or blind will be $1,200 (up from $1,150 for 2012). Single taxpayer or head of household who is 65 or over or blind, the additional standard deduction for 2013 will be $1,500 (up from $1,450 for 2012). 64

65 Exemption amount is $3,800 in 2012 $3,900 in 2013 EXEMPTIONS NOTE: an individual (e.g., a child) who can be claimed as a dependent by another individual (e.g., the child's parent) can't claim his or her own personal exemption. NOTE: No exemption is allowed for any individual unless the individual's TIN is included on the return claiming the exemption. Code Sec

66 PERSONAL EXEMPTION PHASE-OUT The personal exemption phase-out does not apply for 2010 through 2012, but will apply in NOTE: For 2008 and 2009, the reduction was equal to one-third of the otherwise applicable phase-out amount. MFJ: 2% for each $2,500 (or fraction thereof) by which the AGI of a taxpayer (other than a married taxpayer filing separately) exceeds the threshold amount for that taxpayer. MFS: 2% for each $1,250 (or fraction of that amount) by which the taxpayer's AGI exceeds the threshold amount. 66

67 PERSONAL EXEMPTIONS Qualifying Child A qualifying child is an individual who: 1. Bears a relationship to the taxpayer 2. Has the same principal place of abode as the taxpayer for more than one-half of that tax year; 3. Hasn't attained a specified age; and 4. Hasn't provided over one-half of his or her own support for the calendar year in which the taxpayer's tax year begins. Code Sec

68 ITEMIZED DEDUCTIONS The reduction of itemized deductions does not apply for tax years beginning in 2010 through (without extension): Aallowable itemized deductions are reduced by the lesser of: 3% of the excess of adjusted gross income over the applicable amount, or 80% of the itemized deductions otherwise allowable for the tax year. (Code Sec. 68(a)) 68

69 STATE SALES TAX For tax years beginning before 2012, taxpayers could elect to deduct (as an itemized deduction) state and local general sales taxes and compensating use taxes, in lieu of deducting state and local income taxes. (Code Sec. 164(b)(5)(A)) 69

70 DUE DILIGENCE SCH A Charitable Contributions 70

71 CHARITABLE CONTRIBUTIONS No charitable deduction is allowed for any (cash or property) contribution of $250 or more unless taxpayer substantiates it by a contemporaneous written acknowledgement (not just a cancelled check) from the donee (or its agent). (Code Sec. 170(f)(8)(A). DEFINITIONS: A monetary gift would include a transfer of a gift card redeemable for cash, and a payment made by credit card, electronic fund transfer, online payment service, or payroll deduction. A bank record would include a statement from a financial institution, an electronic fund transfer receipt, a cancelled check, a scanned image of both sides of a cancelled check obtained from a bank website, or a credit card statement. Written communication would include electronic mail correspondence. Prop Reg 1.170A-15(b) 71

72 CHARITABLE CONTRIBUTIONS FORM 8283 For noncash contributions that are: More than $500 but not more than $5,000 - The donor must attach to his or her return a description of the contributed property. More than $5,000 but not more than $500,000 - The donor must obtain a qualified appraisal (one meeting specified IRS requirements) and attach to his or her return information about the property. More than $500,000, the donor must attached a qualified appraisal to his or her return. Code Sec. 170(f) 72

73 NONCASH CONTRIBUTIONS VEHICLES, ETC The donor's charitable deduction can't exceed the gross proceeds from the charity's sale proceeds unless: there's a significant intervening use of the vehicle by the charity prior to its sale; the charity materially improves the vehicle prior to its sale the charity sells it at a price significantly below FMV to a needy individual, in direct furtherance of its charitable purpose of relieving the poor and distressed or the underprivileged who need vehicles. Code Sec. 170(f) 73

74 NONCASH CONTRIBUTIONS Clothing or Household Items No charitable deduction is allowed for any contribution of clothing or a household item unless the clothing or household item is in good used condition or better. (Code Sec. 170(f)(16)(A)) IRS is authorized to issue regs denying a charitable deduction for any contribution of clothing or a household item that has minimal monetary value, such as used socks and undergarments. Household items includes: furniture furnishings electronics appliances linens other similar items Code Sec. 170(f) 74

75 OUT-OF-POCKET EXPENSES No charitable deduction is allowed for the value of services a taxpayer renders to charity. (Reg 1.170A-1(g)) But the taxpayer is generally allowed a charitable deduction for his unreimbursed out-of-pocket expenses necessarily incurred in performing services free for a charity. (Code Sec. 170(f)(6) 75

76 OUT-OF-POCKET EXPENSES A taxpayer who uses his or her car in performing these services may deduct 14 per mile as a contribution (Code Sec. 170(i)) Or the actual (unreimbursed) expenses for gas and oil Parking fees and tolls are deductible in either case, as are deductions otherwise allowable for interest or taxes connected with the car, but not depreciation, insurance and repairs. 76

77 MEDICAL LIMITS CHANGE the amount of medical expenses an individual may deduct in a tax year is the amount by which his unreimbursed payments for those expenses exceed 7.5% of his adjusted gross income (AGI) for the year. Beginning after December 31, 2012, the threshold for the itemized deduction for medical expenses will increase to 10% for tax years. (2010 Health Care Act). NOTE: For the years 2013 through 2016, if either the taxpayer or the taxpayer's spouse is age 65 before the end of the taxable year, the increased threshold will not apply. (Code Sec. 213(a), (f) as amended by 2010 Health Care Act) 77

78 CASUALTY LOSSES Federal Disaster Areas A taxpayer may elect to deduct a disaster loss for the tax year the loss occurred, or for the tax year before the year the loss occurred. (Code Sec. 165(i)) A taxpayer whose residence is located in a federally-declared disaster area may deduct any loss attributable to the disaster as a casualty loss if the residence is rendered unsafe by the disaster, and he or she is ordered (within 120 days after the disaster designation) by the state or local government to demolish or relocate the residence. (Code Sec. 165(k)) 78

79 MISC ITEMIZED DED SUBJ TO 2% Employee Expenses The expenses of seeking new employment in his same trade or business, whether or not the employee gets the new job Dues, fines paid to remain in a union, strike funds, compulsory payments for unemployment benefits, and a mandatory service charge paid to a union by a nonmember Cost and maintenance of clothing 79

80 MISC ITEMIZED DED SUBJ TO 2% Employee Expenses Small tools and supplies: Salesperson's briefcase used in business Salesperson's commissions paid to a third party who made the sales Expenses incurred by a securities analyst for a stock brokerage firm in seeking to get new business for the employer and by so doing increase his or her own salary 80

81 MISC ITEMIZED DED SUBJ TO 2% Employee Expenses Travel expenses (including meals and lodging) while away from home on business; The costs of entertaining customers or clients if the entertainment is directly related or associated with business; and Gas, oil and depreciation for an automobile used for business-related transportation (but not commuting). 81

82 MISC ITEMIZED DED SUBJ TO 2% Non-business Expenses related to investment income or property, such as investment counselling or advisory fees; Any allowable losses from traditional IRAs or Roth IRAs; Tax return preparation costs and related expenses; Appraisal fees paid to determine the amount of a casualty loss or a charitable contribution of property; and Hobby expenses to the extent of hobby income. (Reg T(a)(1)) 82

83 MISC ITEMIZE DED NOT SUBJECT TO 2% Amortizable premium on taxable bonds. Casualty and theft losses from income-producing property. Federal estate tax on income in respect of a decedent. Gambling losses up to the amount of gambling winnings. Impairment-related work expenses of persons with disabilities. Loss from other activities from Schedule K-1 (Form 1065-B), box 2. Losses from Ponzi-type investment schemes. Repayments of more than $3,000 under a claim of right. Unrecovered investment in an annuity. 83

84 CALCULATING THE TAX 84

85 2012 Tax Rates Tax Bracket Married Filing Jointly Single 10% Bracket $0 $17,400 $0 $8,700 15% Bracket $17,400 $70,700 $8,700 $35,350 25% Bracket $70,700 $142,700 $35,350 $85,650 28% Bracket $142,700 $217,450 $85,650 $178,650 33% Bracket $217,450 $388,350 $178,650 $388,350 35% Bracket Over $388,350 Over $388,350 85

86 KIDDIE TAX The child's first $950 of 2012 unearned income ZERO tax The next $950 of unearned income is taxed at the child's tax rate The remainder of the child's unearned income is taxed at the parent's marginal rate. Parents' highest marginal rate on the individual's unearned income over $1,900 for 2012 or $2,000 for

87 ALTERNATIVE MINIMUM TAX - AMT Absent an increase for 2012, the exemption amounts will be: $45,000 joint filers and surviving spouses $33,750 single taxpayers who are not surviving spouses $22,500 married taxpayers filing separately The AMT exemption amount is reduced by an amount equal to 25 percent of the excess of AMTI over $150,000 married taxpayers filing jointly and surviving spouses $112,500 single taxpayers $75,000 married taxpayers filing separately Code Sec. 55(d)(3) 87

88 CREDITS 88

89 BUSINESS TAX CREDITS Differential wage payment credit (Code Sec. 38(b)(33)) Disabled access credit (Code Sec. 38(b)(7)) Employer social security credit (Code Sec. 38(b)(11)) Employer-provided child care credit (Code Sec. 38(b)(15)) Energy efficient appliance credit (Code Sec. 38(b)(24)) Energy efficient home credit (Code Sec. 38(b)(23)) Incremental research credit (Code Sec. 38(b)(4)) Investment credit (Code Sec. 38(b)(1)), (which includes the rehabilitation credit, the energy credit and the reforestation credit) Small employer health insurance credit (Code Sec. 38(b)(36)) Small employer pension plan startup credit (Code Sec. 38(b)(14)) Work opportunity credit (Code Sec. 38(b)(2)) 89

90 NON REFUNDABLE PERSONAL CREDITS Adoption credit (was refundable for 2011 only) Credit for the elderly and the permanently and totally disabled Credit for child and dependent care expenses Credit for certain home mortgage interest Lifetime Learning credit Nonbusiness energy property credit Residential energy efficient property credit Saver's credit for elective deferrals and IRA contributions NOTE: For tax years beginning in 2000 through 2011, the nonrefundable personal credits could offset AMT as well as regular tax. 90

91 HOPE SCHOLARSHIP CREDIT The Hope credit is available only for qualified expenses of the first two years of undergraduate education; Credit equals 100% of up to $1,000 (indexed) of qualified higher-education tuition and related expenses plus 50% of the next $1,000 (indexed) of expenses Credits phase out for higher-income taxpayers. 91

92 AMERICAN OPPORTUNITY CREDIT For tax years beginning in 2009 through 2012 Equals the sum of 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of qualified expenses, For a maximum credit of $2,500 per eligible student. (Code Sec. 25A(i)(1)) Definition of qualifying expenses is expanded to include course materials in addition to tuition and fees. Phased out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return). The modified credit may be claimed against a taxpayer's alternative minimum tax liability. 40% of a taxpayer's otherwise allowable American Opportunity credit is refundable.. NOTE: Unlike the Hope credit, the American Opportunity credit is allowed for each of the first four years of the student's post-secondary education in a degree or certificate program. 92

93 LIFETIME LEARNING CREDIT Taxpayers may elect a Lifetime Learning credit equal to 20% of up to $10,000 of qualified tuition and related expenses paid (defined in previous section) during the tax year. The maximum credit is $2,000. (Code Sec. 25A(a)(2); Code Sec. 25A(c)(1)) For 2012, the Lifetime Learning credit phases out ratably for taxpayers with modified AGI of $52,000 to $62,000 ($104,000 to $124,000 for joint return filers). 93

94 CHILD & DEPENDENT CARE CREDIT The credit is 35% of employment-related expenses incurred by taxpayers with AGI of $15,000 or less. The percentage decreases by 1% for each $2,000 (or fraction of that amount) of AGI over $15,000, but not below 20%. Taxpayers with AGI over $43,000, the applicable percentage is 20%. Code Sec. 21(a) 94

95 SAVERS CREDIT For 2012, the applicable percentage (50%, 20%, or 10%) depends on filing status and modified AGI, as follows: Joint filers: $0 to $34,500, 50%; $34,500 to $37,500, 20%; and $37,500 to $57,500, 10% (no credit if AGI is above $57,500). Heads of households: $0 to $25,875, 50%; $25,875 to $28,125, 20%; and $28,125 to $43,125, 10% (no credit if AGI is above $43,125). All other filers: $0 to $17,250, 50%; $17,250 to $18,750, 20%; and $18,750 to $28,750, 10% (no credit if AGI is above $28,750). For 2013, the corresponding figures are: Joint filers: $0 to $34,500, 50%; $34,500 to $37,500, 20%; and $37,500 to $57,500, 10% (no credit if AGI is above $57,500). Heads of households: $0 to $25,875, 50%; $25,875 to $28,125, 20%; and $28,125 to $43,125, 10% (no credit if AGI is above $43,125). All other filers: $0 to $17,250, 50%; $17,250 to $18,750, 20%; and $18,750 to $28,750, 10% (no credit if AGI is above $28,750). 95

96 NONBUSINESS ENERGY PROPERTY CREDIT For certain energy saving home improvements Credit applies to qualifying improvements placed in service in tax years 2006 and 2007 or in tax years 2009 through 2011; NOTE: Credit is not available for improvements placed in service in 2008 or after

97 RESIDENTIAL ENERGY EFFICIENT PROPERTY CREDIT For property placed in service after 2008 and before 2017, an individual is allowed an annual credit for the purchase of residential energy efficient property equal to the sum of: 30% of the amount paid for qualified solar energy property (i.e., property that uses solar power to generate electricity in a home); 30% of the amount paid for qualified solar water heating property; 30% of the amount paid for qualified fuel cell property, up to a maximum credit of $500 for each 0.5 kilowatt of capacity; 30% of the amount of any small wind energy property (i.e., property that uses a wind turbine to generate electricity for use in a home) expenditure; and 30% of the qualified geothermal heat pump property expenditures. (Code Sec. 25D(a); Code Sec. 25D(b)) NOTE: The 2008 Energy Act extended the credit for eight years through December 31, 2016, while the American Recovery and Reinvestment Act of 2009 modified the credit for tax years beginning after

98 ALTERNATIVE MOTOR VEHICLE CREDIT New QUALIFIED FUEL CELL MOTOR VEHICLE CREDIT for the purchase of a fuel cell vehicle (before 2015 (Code Sec. 30B(j))). New ADVANCE LEAN-BURN TECHNOLOGY MOTOR VEHICLE CREDIT for the purchase (before 2011) (Code Sec. 30B(j)). PLUG-IN CONVERSION CREDIT is equal to 10% of the cost, up to a maximum credit of $4,000, of converting any motor vehicle into a qualified plug-in electric drive motor vehicle. (Code Sec. 30B(i). The credit is available for property placed in service after February 17, 2009, and before

99 ALTERNATIVE MOTOR VEHICLE CREDIT New QUALIFIED HYBRID MOTOR VEHICLE CREDIT for a purchase (before 2011 for a passenger car or light truck, before 2010 for other vehicles (Code Sec. 30B(j))) of an auto or light truck (vehicles weighing 8,500 pounds or less). New QUALIFIED ALTERNATIVE FUEL MOTOR VEHICLE CREDIT is equal to 50% of a vehicle's incremental cost, plus an additional 30% if the vehicle meets certain emissions standards, but not more than between $4,000 and $32,000, depending on the weight of the vehicle (for property purchased before 2011). (Code Sec. 30B(j)) 99

100 NEW QUALIFIED PLUG-IN ELECTRIC DRIVE MOTOR VEHICLE CREDIT For vehicles acquired after 2009, The credit is equal to the sum of: (1) $2,500; plus (2) for a vehicle that draws propulsion energy from a battery with not less than five kilowatt hours of capacity, $417 for each kilowatt hour of capacity in excess of five kilowatt hours, but not in excess of $5,000. NOTE: The maximum credit is $7,500, regardless of weight. The post-2009 credit phases out. 100

101 PLUG-IN ELECTRIC VEHICLE CREDIT For vehicles bought after February 17, 2009, and before 2012, a taxpayer can claim a 10% nonrefundable personal credit for electric drive low-speed vehicles, motorcycles, and three-wheeled vehicles. Code Sec. 30(a). The maximum credit for these vehicles is $2,

102 FIRST-TIME HOMEBUYERS CREDIT While the credit is no longer available to homebuyers, taxpayers who claimed the credit may be subject to recapture of all or a portion of the credit. In the case of qualifying purchases made on or before December 31, 2008, the credit is recaptured ratably over 15 years with no interest charge. (Code Sec. 36(f)(1)) In the case of qualifying purchases made on or after January 1, 2009, recapture will apply only if the taxpayer disposes of the home or the home otherwise ceases to be the principal residence of the taxpayer within 36 months from the date of purchase. 102

103 REFUNDABLE CREDITS Alternative minimum tax (AMT) refundable credit for individuals American opportunity tax credit (partly refundable) Credit for income tax withheld Credit for excess social security tax withheld Child tax credit (partly refundable) Earned income credit (EIC) 103

104 EIC DUE DILIGENCE - What's Hot? Review IRS Hot Topics for Return Preparers for the latest EITC news. Paid preparers failing to meet their EITC Due Diligence requirements on EITC claims face higher penalties. The United States-Korea Free Trade Implementation Act amended IRC section 6695(g) by striking the $100 and inserting $500. The increased penalty is an incentive for due diligence compliance, ensuring more accurate EITC claims. New EITC Due Diligence requirements finalized in December Internal Revenue Bulletin: FORM 8867, Paid Preparers Earned Income Tax Checklist Publication 4933, Tax Preparers Guide to Everything & Earned Income Tax Credit Online 104

105 EIC 7.65% taxpayer without children. 34% taxpayer with one qualifying child is 40% taxpayer with two or more qualifying children 45% families with three or more qualifying children. Temporary increase for tax years 2009 through

106 EIC For 2012, this statutory level is $6,210 for a taxpayer with no qualifying children $9,320 for a taxpayer with one qualifying child $13,090 for a taxpayer with two or more qualifying children The phase-out percentages are 15.98% for taxpayers with one qualifying child 21.06% for taxpayers with two or more qualifying children 7.65% for taxpayers with no qualifying children 106

107 EIC 2012, the phase-out of the EIC begins at $12,980 for joint filers with no qualifying children $ 7,770 for others with no qualifying children $22,300 for joint filers with one or more qualifying children $17,090 for others with one or more qualifying children 107

108 CHILD TAX CREDIT $1,000 for each qualifying child under age 17 at the close of the calendar year in which the tax year begins. (Code Sec. 24). The amount of the credit allowable is reduced (not below zero) by $50 for each $1,000 (or fraction thereof) of modified AGI above $110,000 for joint filers, $75,000 for unmarried individuals, and $55,000 for married filing separately. (Code Sec. 24(b)) No child credit is allowed for a child for a tax year unless the taxpayer includes the child's name and TIN on the return for the year. (Code Sec. 24(e)) 108

109 REFUNDABLE CHILD TAX CREDIT The inflation-adjusted threshold amount for calculating the refundable child tax credit is generally $10,000 as adjusted for inflation. The American Recovery and Reinvestment Act of 2009 (P.L ) and extended by the 2010 Tax Relief Act ( P.L ) reset the threshold at $3,000 for tax years beginning in 2009 through

110 ADOPTION CREDIT An individual may claim an income tax credit for qualified adoption expenses. (Code Sec. 23) The credit is refundable, and is allowed against income tax and alternative minimum tax (AMT). The maximum credit is $12,650 for 2012, for both special needs and non-special needs adoptions. For 2012, the credit begins to phase out for taxpayers with modified adjusted gross income (AGI) over $189,710 and is fully eliminated at modified AGI of $229,710. All these dollar amounts are adjusted annually for inflation. 110

111 MISCELLANEOUS 111

112 DUE DILIGENCE OTHER US Treasury Circular Updated Diligence as to accuracy. (a) In general. A practitioner must exercise due diligence (1) In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters; (2) In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and (3) In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the Internal Revenue Service. (b) Reliance on others. Except as provided in 10.34, and 10.37, a practitioner will be presumed to have exercised due diligence for purposes of this section if the practitioner relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person. 112

113 DUE DILIGENCE - OTHER IRS Letters and Visits to Return Preparers - FAQs Filing Season The purpose of these visits is: To confirm tax return preparers are complying with current return preparer requirements, including the maintenance of records and signing and furnishing of PTINs on the tax returns that they prepare if required to do so; and To provide information on new return preparer requirements effective for the 2013 filing season. 113

114 DUE DILIGENCE - OTHER CHECKING TO SEE IF: Provided the client with a copy of the tax return, Signed the tax return as required by regulations, Furnished their identifying number as required by regulations, Retained a copy or list of returns and claims for refund as required by regulations, Filed correct information returns, Properly refused to endorse or negotiate a refund check that was issued to a taxpayer, and Properly safeguarded taxpayer information. 114

115 DUE DILIGENCE - OTHER Does a tax return preparer have an obligation to make inquiries of a taxpayer? Yes. Examples: Whether or not the taxpayer made charitable contributions or if they own their own home. Must make general inquiries or have existing knowledge of the taxpayer's sources of income, Must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. Some provisions of the Internal Revenue Code or regulations require that specific facts and circumstances exist (for example, that the taxpayer maintains specific documents) before a deduction or credit may be claimed. 115

116 WITHHOLDING TAXES W-4. The employee must amend his Form W-4, reducing the number of allowances, within ten days: (Code Sec. 3402(f)(2)(B); Reg (f)(2)-1(b)) Gambling Winnings: Payers must withhold 25% on proceeds of more than $5,000 (Code Sec. 3402(q)(1)) Pension and Annuities: Withholding of 20% is required on any designated distribution that's an eligible rollover distribution unless there's a direct trustee-to-trustee transfer. 116

117 BACKUP WITHHOLDING IRS Pub 1281 & Pub 505 A payor of any reportable payment must withhold 28% of the payment if: The payee has failed to furnish his taxpayer identification number (TIN) to the payor (Code Sec. 3406(a)(1)(A)) or furnishes an obviously incorrect number, (Code Sec. 3406(h)(1)) such as one without nine digits or which includes letters of the alphabet. (Reg (h)-1(b)) The IRS or a broker has notified (the B-notice ) the payor that the TIN furnished by the payee is incorrect. (Code Sec. 3406(a)(1); Code Sec. 3406(d)(2)) There has been a notified payee underreporting with respect to interest and dividends. (Code Sec. 3406(a)(1)(C)) 117

118 ESTIMATED TAX PAYMENTS 90% of the tax shown on the current year's return or 100% of the tax shown on the prior year's return even if filed late. If adjusted gross income on the prior year's return is over $150,000 (over $75,000 if married filing separately) must pay the lower of 90% of the tax shown on the current year's return or 110% of the tax shown on the prior year's return. 118

119 RESOURCES Internal Revenue Manual JCX-1-12, List Of Expiring Federal Tax Provisions P.L , "Moving Ahead for Progress in the 21st Century Act" or the "MAP-21". American Recovery and Reinvestment Act of 2009 (P.L ) 2010 Tax Relief Act ( P.L ) 2010 Health Care Act & 119