Written By Barbara Pash
Taxes touch everyone, as the saying goes, in the pocket.
By the end of 2011, the U.S. Congress had taken action on certain bills that affect individual and family taxes. But uncertainty remains over several others and the 2011 income tax season is going to be challenging.
“For families with incomes of $100,000 or more, which is not unusual with dual working parents, it’s hard to do tax planning,” said Alice Reid, EA, of Compassionate Tax Service in Reisterstown, Md., and a board member of the Maryland Society of Accountants (MSA). “The uncertainty makes it hard to know whether to increase donations or make changes in your 401(k) pension plan.
“The U.S. Congress needs to make decisions, she said. “We’ve had a decade of renewing expiring tax credits. That makes it challenging for taxpayers to manage their tax burden.”
In a discussion of the 2011 tax season and the possible changes ahead, Reid was joined by Alverta “Sandy” Steinwedel, executive director of the MSA, and Shelby Bowles, CPA, of Newburg, and an MSA board member, They had several concerns:
As we went to press, the fate of the Federal Insurance Contributions Act (FICA), which funds Medicare and Social Security, was in question. For 2011, Congress enacted a flat, across-the-board 2 percent FICA tax cut for every working person, a reduction from the standard 6.2 percent to 4.2 percent on gross pay, according to Reid.
The special, one-year-only rate was due to expire on December 31, 2011, but Congress intervened a week before that deadline, extending the tax cut for an additional two months. If no further action is taken after that, paychecks will be reduced by 2 percent as the withholding FICA tax goes back to the standard of 6.2 percent.
Energy-related tax credits are offered as an incentive to buy energy-efficient appliances or install energy-saving systems like home solar panels. But taxpayers may find that they do not qualify.
For example, Bowles said, “Taxpayers may think they’re getting a credit on their tax return because an [appliance] salesperson told them so. But the manufacturer may have already taken the energy credit to lower the price of the appliance. There is consumer confusion, and some credits are expiring.”
Earned Income Credit is a tax credit given to qualified working people whose incomes fall below a federally set level. “A lot of families depend on this refund,” said Reid, “but there is also fraud. For 2011, the IRS is implementing additional due diligence with which tax professionals must comply.”
Although there are no substantive changes in Schedule A (mortgage interest, charitable deductions, medical and dental expenses and state and local income taxes), the deduction for mortgage insurance is set to expire in 2012.
However, there is a change in Schedule D. A new capital gains form, 8949, has been introduced for the 2011 tax year for the sale of stocks and bonds.
According to Steinwedel, the IRS’ goal is greater oversight of brokerage houses, which have new reporting requirements. For taxpayers, Form 8949 calls for more disclosure and more detail. If there are discrepancies between the information provided by a brokerage house and that filed by a taxpayer, a reconciliation process kicks in.
“The capital gains rate stays the same,” said Steinwedel, “but Form 8949 adds a level of complexity.” Indeed, she said, when she first saw the new form herself, she found it “difficult and challenging to fill out.”
An upcoming change in health insurance deductions may catch self-employed individuals by surprise. For 2011, the self-employed can deduct health insurance premiums from net profits before calculating their self-employment tax. “This has been a significant savings for the self-employed,” said Reid. But the provision expires for those filing in 2012.
Another change coming in 2012 is in the deduction of up to $250 before adjusted gross income that teachers of grades kindergarten through 12 can take for educational expenses. The deduction can still be taken for the 2011 tax year but it expires in 2012.
The IRS has updated and is tweaking its software. For employers, banks and financial institutions, that means more oversight. “Clients tell me they are getting many more notices for mismatched information,” said Reid.
For the individual taxpayer, it means a greater level of proof. The IRS wants to get what is owed the government, and it is also going after refunds that turn out to be unjustified.
“Five years ago,” said Steinwedel, “people who filed their returns wouldn’t receive discrepancy notices from the IRS for two or three years. Now, it’s eight months. The IRS figures that once the taxpayer has the refund, it’s harder to get it back.”
Tax professionals themselves must comply with new, more stringent IRS regulations. For example, if they file 10 or more individual returns annually, the returns must be filed electronically unless the taxpayer signs a waiver. They are also required to register with the IRS and get a preparer tax identification number (PTIN).
The IRS is also more closely examining so-called tax resolution firms that say they will represent you in disputes with the IRS. “Several have lost their licenses,” said Reid.
As for tax-preparation software, “it’s only as good as the person using it,” said Reid, adding that you could pay too much tax, or the opposite: understate your taxes, with the latter resulting in penalties and interest when the IRS eventually catches the mistake.
“Clients ask me, ÔWhat are the possible changes in the tax law?’” said Reid, who spends 60 hours a year taking continuing education courses just to keep up with the current tax laws. “I keep abreast but it’s not easy to know until bills are actually signed into law,” she said.
“Sometimes,” she said, “it’s like standing in quicksand.”
