Today is the first mailing day of the New Year. It won’t be long before the postal carrier starts delivering those pesky little tax forms – 1099s, W-2s, and the like.
Do yourself (and your tax preparer) a big favor – get a file folder or large envelope, and put it in a place where you open your mail. After reviewing the documents for accuracy, simply put them into the folder and forget about them until it’s time to take your information to your preparer. (Of course, it there’s something on the forms that is wrong, follow up with the issuer first – and soon.) That way, all those forms will be in one place – and you won’t have to search through stacks of mail to find them.
If you’re really organized, tape a list of last year’s tax document issuers (banks, employers, customers, etc.) to the front of the folder or envelope – and check them off as the new forms arrive. It’ll make it easier to figure out what may be missing!
And don’t forget – make an appointment with your tax preparer as early as possible, so that there will be enough time to prepare and review an accurate return.
I’m sure you’ve heard in the news that just before Chrismas, Congress finally passed, and the President signed, a two-month extension of the payroll tax cut that was enacted earlier this year. That means that at least for two months the employee social security withholding rate will remain at 4.2% (instead of 6.2% that the employer pays). Who knows what will come in March – whether it will be re-extended or repealed.
One item in the law that the news hasn’t really covered may affect many businesses normal practice as it relates to employees and yearly bonuses. The law has a “recapture” provision that applies to employees that earn more than $18,350 during the first two months of 2012 (that’s one-sixth of the $110,100 social security wage base this year.) The new rule imposes an extra 2% income tax on the excess wages earned during the two month period. The tax doesn’t affect withholding and payroll; it’ll be applied when the affected employees file their 2012 income tax return.
The main reason I’m bringing this to your attention is that many businesses pay bonuses to employees in the early part of the year, based on the previous year’s results. Presuming they will be paid more than the maximum for that two-month period, they would only have 4.2% social security withheld – but when they file their 2012 return, they’ll pay 2% more income tax on the excess earnings. Don’t have a clue how THAT’s going to be reported; IRS is to issue regulations on how to deal with it later. But unless Congress acts to extend the cut for a longer period, and to repeal this recapture provision too, W-2s are likely going to be harder to prepare for 2012!
Of course, there’s not much time before calendar year-end, but you may want to discuss the possibility of timing the bonus in 2011 – to avoid the recapture issue.Call me if you have any questions.
Selling Inherited Property? Tax Rules That Make a Difference
Sooner or later, you may decide to sell property you inherited from a parent or other loved one. Whether the property is an investment, an antique, land, or something else, the sale may result in a taxable gain or loss. But how that gain or loss is calculated may surprise you.
When you sell property you purchased, you generally figure gain or loss by comparing the amount you receive in the sale transaction with your cost basis (as adjusted for certain items, such as depreciation). Inherited property is treated differently. Instead of cost, your basis in inherited property is generally its fair market value on the date of death (or an alternate valuation date elected by the estate’s executor, generally six months after the date of death).
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…to be generous! Many of us use the opportunity of the holidays to clean out our closets, and to donate gently-used items to deserving charities. In most cases, that generosity can result in a tax deduction – if you follow the rules.
If you’re donating clothing and household items, they must be in good used condition or better – no torn jeans unless that’s how they looked when you purchased them! Get a receipt from the charity, but don’t be surprised if they don’t assign a value to the donated items – or even itemize them. It’s up to you to make a list (and check it twice) of what you’re donating, and to estimate its fair market value at the time of the gift. There are resources available to help you with that – a good one is ItsDeductibleOnline.com – or go through the thrift shop to compare prices. Remember, if you’re ever audited, you’ll need some documentation of your valuation methodology. If the year’s total noncash donations exceed $500, you’ll need even more documentation – just ask your CPA or other tax provider what the rules are.
But don’t let tax law or benefits rule your decision – the gift should come from the heart, even while IRS gives you some lovely tax benefits for being generous.
Did you pay any noncorporate vendor more than $600 for services in 2011? If so, you may be required to issue them a Form 1099-MISC in January. Beware – the reporting requirements have changed this year – if you paid them via credit card, don’t include that payment in the reportable total. That’s because there’s a new form (1099-K) that will be filed by credit card companies and other third-party payment services (such as PayPal, etc.) to report your credit card payments.
If you receive a Form 1099-K, be sure to let your tax preparer know about it – there may be disclosures to make that will avoid “matching” issues with the IRS.
Does your business provide employer-sponsored health coverage to your employees? It’s optional for 2011, but will be mandatory for 2012…employers must begin reporting the cost of the healthcare benefits they provide to all employees on Forms W-2. Since the beginning of the year is just around the corner, it’s definitely time to get systems in place (if you haven’t already done so) to gather the required information. That will make your life much easier when January 2012 rolls around – you’ll have what you need at your fingertips.
Now that mortgage rates are at historically low levels, we’re seeing a lot of our clients refinancing their mortgages. Unfortunately, sometimes the first indication we have that this is occurring is when the mortgage officer calls to ask us to confirm that we prepared the client’s return, and other information related to the return (like employment confirmation, etc.)
IRS regulations prohibit a paid return preparer from using or disclosing ANY information received during the tax return preparation process to a third party without prior written consent. This includes the fact that we prepared the return, even though it’s evident from the return itself.
So save yourself some time and let us know that you’re applying to refinance your mortgage. That way, we’ll provide you with consents to disclose tax return information to the mortgage company – so when they call, we can answer their questions!
As of this morning, you’ll see a brand new look on our website at www.mbr-cpa.com. It’s been redesigned to make navigation easier, and add more tools & tips – including the brand-new blog. Let us know what you think of it.
Family Loans — Tax Considerations
Tighter lending standards have made it more difficult to obtain financing to start or expand small businesses and buy homes. If your child or grandchild is having a hard time getting a loan from a commercial lender, you may be willing to help out by lending the money yourself.
Have a Written Agreement
Start by putting the loan agreement in writing. This may seem like an unnecessary formality, but without a written loan document, the IRS could argue that the transaction was a gift instead of a loan, potentially creating gift-tax issues.
Having written documentation is also important in case the borrower fails to repay all or part of the loan. In that situation, you’d want to be able to show you’re entitled to write off the unpaid amount as a nonbusiness bad debt.
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Did you know that, beginning January 1, 2012, all professionals who prepare at least 10 individual federal returns will be required to file them electronically? This means that, except in very rare circumstances, your professionally-prepared return will no longer be mailable.
This is the second and final stage of the sweeping changes to the filing system that were mandated by legislation enacted in 2009. During the just-completed filing season, the efile requirement applied to professionals preparing 100 returns or more; that number will now be reduced to 10 or more.
There are ways to opt-out of efiling, but it will require the affected taxpayer to sign a waiver which the preparer must maintain in her files. It has no effect on the manner and timing of tax payments – at least for now – and states have differing rules.
Be sure to consult with your tax professional if you have any questions about this new efile requirement.