• Receiving an unexpected or amended K-1 from a trust, estate, partnership, or S-corporation.
• Overlooking an item of income or receiving a corrected 1099.
• Forgetting about a deducible expense.
• Forgetting about an expense that would qualify for a tax credit.

These are among the many reasons individuals need to amend their returns, whether it is for the just-filed 2011 return or prior year returns.

Here are some key points when considering whether to file an amended federal (Form 1040X) or state income tax return.

1. If you are amending for a refund, you should be aware that refunds generally won’t be paid for returns if the three-year statute of limitations from the filing due date has expired. Thus, with the exception of amending a return to carry back a business net operating loss (NOL), the IRS will pay refunds only on returns from 2009 through 2011. Some states have a longer statute.
2. Generally, you do not need to file an amended return to correct math errors. The IRS or state agency will automatically make those corrections. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS or state agency will send a request asking for the missing forms.
3. If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
4. If you owe additional 2011 tax, file Form 1040X and pay the tax before the due date to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.
5. When amending multiple returns, send them in separate envelopes. Sometimes when filed together, they are mistaken for a single return, and the additional returns filed in the same envelope are not processed.
6. If the changes involve another schedule or form, it must be completed and included with the amended return. In addition, it may be appropriate to include documentation to avoid subsequent correspondence from the IRS or state agency.
7. A detailed explanation of the changes must also be attached. This is required to explain to the processing staff the reason for the amendment. In insufficient explanation can lead to additional correspondence and delays.
8. Depending on why you file an amended federal return, you may be required to amend your state return. However, if the federal amendment is filed to claim or correct a tax credit that the state does not have, no state amended return will likely need to be filed. In most other circumstances, you will need to amend the state return as well as the federal.

An amended return can be more complicated than the original, so please contact this office for assistance in preparing your amended returns.

Purchased Websites – If the website is purchased from a contractor who is at economic risk should the software not perform, the design costs are amortized (ratably deducted) over the three-year period, beginning with the month in which the website is placed in service. For 2012, non-customized computer software placed in service during the year qualifies as Sec 179 property and can be written off in full up to the limits of this special expense deduction.

In-House Developed Websites - If, instead of being purchased, the website design is “developed” by the company or designed by an independent contractor  who is not at risk should the software not perform, the company launching the website can choose among alternative treatments, one of which is deducting the costs in the year that the costs are paid, or accrued, depending on the taxpayer’s overall accounting method. Or, as an alternative, the costs may be amortized under the three-year rule.

Non-Software Expenses – Some website design costs, such as graphics, may not be classified as software and must be deducted over the useful life of the element. Non-software portions of the design with a useful life of no more than a year are currently deductible.

Advertising Content - Advertising costs are generally currently deductible. Thus, the costs of website content that is advertising are generally, currently deductible.

Cost Before Business Starts – Business expenses that are incurred or accrued prior to the actual activation of the business are generally not deductible until the business is terminated or sold. However, a taxpayer can elect to deduct up to $5,000 of the costs in the year that the business starts and amortize the costs in excess of $5,000 over a period of 180 months (15 years), beginning with the month that the business starts.

As you can see, deducting the expenses of a website can be complicated. Please call this office if you have questions.

Long-Term Capital Gains Rates Increase – Taxpayers have enjoyed reduced long-term capital gains rates for several years as a result of the Bush era tax cuts. However, without Congressional action, which is not expected, those reduced rates will return to the higher rates in effect prior to 2003. The table below compares the current long-term capital gains rates to the anticipated rates for 2013 and subsequent years.

Taxpayers with unrealized long-term capital gains may wish to review their holdings and consider whether it is appropriate to sell during 2012 at the lower rates or whether to continue to hold for additional increases in value. Where future increases in value are anticipated, a taxpayer could sell and realize existing gains in 2012 and then repurchase the investment for future anticipated increases. Investment strategies depend on a variety of issues, including existing capital loss carryovers, growth potential of individual investments, and other factors related to each individual, and should be carefully analyzed before taking action.

Regular Tax Rates – In addition to lower long-term capital gains rates, the regular marginal tax rates have been declining since 2001. However, without Congressional action, those reduced rates will return to higher rates in effect prior to 2001. The table below compares the current marginal individual tax rates to the anticipated rates for 2013 and subsequent years.

These increased rates will apply to all varieties of ordinary income including interest, dividends, short-term capital gains, employment income, etc. Marginal tax rates increase as a taxpayer’s overall income increases, taxing the first block of income received at the lowest rate and each subsequent block at ever-increasing rates until the maximum rate is reached. As with assets eligible for the long-term capital gains rates, it may be appropriate for some taxpayers to accelerate ordinary income into 2012 to take advantage of the lower rates.

Surtax on Investment Income – Depending upon what the Supreme Court ultimately decides about the Health Care Law, starting in 2013 a new surtax, called the Unearned Income Medicare Contribution Tax, will be imposed on individuals, estates, and trusts. For individuals, the surtax is 3.8% of the lesser of:

1. The taxpayer’s net investment income or
2. The excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others).

Thus, this surtax will only impact higher income individuals.

“Net” investment income is investment income reduced by allowable investment expenses. Investment income includes:

• Income from interest, dividends, annuities, and royalties,
• Rents (other than derived from a trade or business),
• Capital gains (other than derived from a trade or business),
• Trade or business income that is a passive activity with respect to the taxpayer, and
• Trade or business income with respect to trading financial instruments or commodities.

For surtax purposes, the net investment income does not include excluded items, such as interest on tax-exempt bonds, veterans’ benefits, and excluded gain from the sale of a principal residence.

For planning purposes, existing law favors tax-exempt bond interest, which avoids both the surtax and the regular income tax. However, you should be aware that President Obama’s tax plan would also tax the income from “tax-exempt” bonds for higher-income individuals at generally the same threshold as this surtax kicks in.

It is not too early to start planning for the 2013 tax increases. Prudent planning can significantly reduce the tax bite. At the same time, keep a watchful eye on Congress. Since this is an election year, tax changes are most likely to come after the November elections. Please call this office if we can be of assistance in your investment tax planning.

When you are an employee, the employer pays you a net amount after making all the required tax withholdings and provides you with a W-2 for tax reporting that shows your taxable wages and details all of the withholding amounts. If you are an independent contractor, the employer will pay you a gross amount without any withholding and will issue you a 1099-MISC.

Independent contractors must pay self-employment (SE) tax instead of having FICA (Social Security and Medicare program contributions) deducted from their wages. The SE tax rate is generally twice the amount of the FICA rate. Independent contractors are generally treated the same as self-employed individuals, so the SE tax and income tax are based on their net earnings after deducting any allowable expenses incurred to earn the income.

The problem here is that employees generally do not have tax-deductible expenses related to their jobs, so employees who are incorrectly classified as independent contractors find themselves essentially paying both the employer’s and their own share of the Social Security and Medicare taxes. To make matters worse, as an independent contractor, no federal or state income tax was withheld, leaving the independent contractor with a sometimes unexpected tax liability.

Classifying a worker as an employee or independent contractor is not discretionary for the employer. The employer must follow federal guidelines when making the determination. Basically, it boils down to whether the employer has direction and control over the individual, which includes, among other guidelines, specifying working hours, how to perform the work tasks, the right to fire, etc. If the employer does have direction and control, the individual is probably an employee.

If you have been treated as an independent contractor and think that you are really an employee, you do have recourse. You can file Form 8919. If the IRS agrees with you, you only have to pay the employee share of FICA/Medicare not the self-employment tax. You still have to pay the income tax. The filing will make life miserable for your presumably former “employer,” so it might turn into a bridge-burning exercise.

If you have questions, wish to explore alternatives, or need assistance filing Form 8919, please give this office a call.

Seems simple enough, right? Well, maybe not. Let’s look at all the issues associated with deducting employee work-related expenses. We shall begin by defining the employee business expenses that can either be deducted or reimbursed. To qualify, expenses must be ordinary and necessary in performance of the employee’s duties and generally include:

• Business travel away from home (does not include commuting from home to work and back).
• Business use of the employee’s vehicle.
• Business meals and entertainment (special rules apply).
• Travel.
• Business use of the employee’s home (difficult to qualify for as an employee).
• Education.
• Supplies.
• Tools.

If an employer does not reimburse the expenses, then the only solution is for the employee to itemize the unreimbursed expenses on IRS Form 2106 and then deduct the expenses on Schedule A as an itemized deduction. But here are several negative aspects associated with deducting the expenses on Schedule A:

1. A taxpayer who takes the standard deduction cannot deduct the expenses because the expenses can only be deducted as a part of a taxpayer’s itemized deductions.
2. Even when deducting the expenses as miscellaneous itemized deductions, taxpayers are faced with a limitation. Most miscellaneous itemized deductions, including employee business expenses, are reduced by 2% of the individual’s modified adjusted gross income (MAGI). For example, if the taxpayer’s MAGI is $100,000, he gains no benefit from the first $2,000 of miscellaneous itemized deductions. Thus, if his miscellaneous itemized deduction only consisted of work-related expenses of $3,000, he would only benefit from $1,000 of his work-related expenses ($3,000 less $2,000).
3. Finally, a taxpayer subject to the alternative minimum tax (AMT) faces still another limitation. When computing the AMT, miscellaneous itemized deductions are not allowed. So to the extent of the AMT, no benefit is derived from deducting miscellaneous itemized deductions.

Because of all the limitations associated with deducting the expenses, it is always better to have the expenses reimbursed by the employer under an accountable plan. Under this type of arrangement, the employee must account for each expense and provide the employer with written documentation (expense report). The reimbursement is not taxable to the employee and not included in the employee’s Form W-2. An accountable plan must meet three requirements; the employee must:

1. Have paid or incurred expenses that are deductible while performing services as an employee.
2. Adequately account to the employer for these expenses within a reasonable time period.
3. Return any excess reimbursement or allowance within a reasonable time period.

If the plan under which the employer reimburses the employee is non-accountable, then the payments the employee receives should be included in the wages shown on his Form W-2. The employee must report the income and itemize deductions to deduct these expenses.

Some employers may not be willing to pick up the additional expense, in which case the employee can try negotiating a pay reduction and corresponding expense reimbursement.

The employee must also keep adequate records of his work-related expenses.

And one last word of advice: if an employee is eligible to be reimbursed for a work-related expense but fails to request reimbursement from his employer, the employee may not claim the expense as a deduction on his tax return.

If you have questions related to the tax treatment of employee work-related expenses, please give this office a call.

Where’s My Refund? is an interactive tool on the IRS website. Whether you split your refund among several accounts, opted for direct deposit into one account, or asked the IRS to mail you a check, Where’s My Refund? will give you online access to your refund information nearly 24 hours a day, 7 days a week.

If you e-file, you can get refund information 72 hours after the IRS acknowledges receipt of your return. If you file a paper return, refund information will be available within approximately four weeks. When checking the status of your refund, have your federal tax return handy. To access your personalized refund information, you must enter:

• Your Social Security Number (or Individual Taxpayer Identification Number);
• Your Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and
• The exact refund amount shown on your tax return.

Once your personal information has been entered, one of several responses may come up, including the following:

• Acknowledgement that your return was received and is in processing.
• The mailing date or direct deposit date of your refund.
• Notice that the IRS could not deliver your refund due to an incorrect address. You can update your address online using the Where’s My Refund? feature.

Where’s My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you can start a refund trace online.

Where’s My Refund? is also accessible to visually impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes.

If you do not have Internet access, you can check the status of your refund by calling the IRS TeleTax System at 800-829-4477. When calling, you must provide your Social Security Number (or your spouse’s), your filing status, and the exact refund amount shown on your return.

The IRS provides a series of frequently asked questions that provide additional information.

If you have questions or need assistance, please give this office a call.

• Payroll withholding for employees;
• Pension withholding for retirees; and
• Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

Determining how much tax to pre-pay through withholding and estimated tax payments has always been difficult, but thanks to Congress’ constant tinkering with the tax laws, usually in late fall, ensuring there are no underpayment penalties or tax surprises when the tax return is prepared next year merely adds complexity.

One of the biggest unknowns for 2012 is the alternative minimum tax (AMT). Beginning in 2001, the exemption to the amount of income not subject to AMT was substantially increased and inflation-adjusted in subsequent years. However, the increased exemption amounts are not permanent and must be extended by Congress on a year-by-year basis. So far Congress has not acted for 2012, and if they do not, the AMT exemption will revert to 2000 levels, roughly one-half of the current amount. Without Congressional action an estimated 30 million taxpayers, approximately 20% of all taxpayers, will be hit by the AMT in 2012. Compare this to the roughly 600,000 taxpayers in 1997 (approximately 1% of all 1997 taxpayers) who were affected by the AMT.

When a taxpayer fails to prepay a safe harbor (minimum) amount, he or she can be subject to the underpayment penalty. This penalty is the short-term federal rate plus 3 percentage points and the penalty is computed on a quarter-by-quarter basis. So, even if you pre-pay the correct amount for the year, if the amounts are not paid evenly you could be subject to a penalty. Interestingly enough, withholding amounts are treated as paid ratably throughout the year, so taxpayers who are underpaid in the earlier part of the year can compensate by bumping up their withholding in the later part of the year.

Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de minimis amount, no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:

1. The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
2. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for a higher income taxpayer whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

   Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.

   However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

If your state has a state tax, the safe-harbor amount may be a different percentage.

This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc.

If you have questions regarding your pre-payments or would like to review and adjust your W-4 payroll withholding, W-4P pension withholding, and estimated tax payments to provide the desired tax result for 2012, please give this office a call.

By failing to file a return, people stand to lose more than a refund of taxes withheld or paid during 2008. In addition, many low- and moderate-income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families with incomes below certain thresholds, which in 2008 were $38,646 ($41,646 married joint) for those with two or more children, $33,995 ($36,995 married joint) for people with one child, and $12,880 ($15,880 married joint) for those with no children.

When filing a 2008 return, the law requires that the return be properly addressed, mailed, and postmarked by April 17 (normally the due date would April 15, but April 15 falls on a Sunday and Monday the 16th is a legal holiday in Washington, D.C., so the due date has been extended until the 17th). There is no penalty for filing a late return that qualifies for a refund.

As a reminder, taxpayers seeking a 2008 refund should know that their checks will be held if they have not filed tax returns for 2009 and 2010. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to offset unpaid child support or past due federal debts, such as student loans.

Please give this office a call as soon as possible if you have not filed your 2008 return. Sufficient time is needed to prepare and print the return and for you take it to the post office for proof of mailing.

In addition, the April 17, 2012 deadline also applies to the following:

• Tax year 2011 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.
• Tax year 2011 contributions to a Roth or traditional IRA – April 17 is the last day contributions for 2011 can be made to either a Roth or traditional IRA, even if an extension is filed.
• Individual estimated tax payments for the first quarter of 2012 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2012 estimated taxes are due on April 17. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. Please call this office for any questions.
• Individual refund claims for tax year 2008 – The regular three-year statute of limitations expires on April 17 for the 2008 tax return. Thus, no refund will be granted for a 2008 original or amended return that is filed after April 17. Caution: The statute does not apply to balances due for unfiled 2008 returns.

If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 17 deadline. Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute. If it is apparent that the information will not be available in time for the April 17 deadline, then let the office know right away so that an extension request, and estimate tax vouchers if needed, may be prepared.

If your returns have not yet been completed, please call right away so that we can schedule an appointment and/or file an extension if necessary.

For several years now, the IRS has required brokerage firms to report the gross proceeds from the sale of stocks and other securities on the Form 1099-B. But just knowing the proceeds from a security sale does not allow the IRS to verify the profit or loss reported by the taxpayer. So beginning with 2011 purchase transactions, brokers are required to track the price paid for the securities and include that information on the 1099-B when that particular security is subsequently sold.

So that the IRS can use the new data to verify taxpayer profit or loss transactions attributable to purchases where the cost information is included with the 1099-B, the year’s transactions must now be broken down into six categories (the last two categories listed do not apply to stock transactions but may apply to sales of other capital assets):

• Long-term sales where the broker IS reporting the cost of the security
• Short-term sales where the broker IS reporting the cost of the security
• Long-term sales where the broker IS NOT reporting the cost of the security
• Short-term sales where the broker IS NOT reporting the cost of the security
• Long-term sales for which no 1099-B is issued
• Short-term sales for which no 1099-B is issued

The IRS has provided a new form 8949 for segregating the transactions within each of these categories. A separate form 8949 must be used for category so the IRS can match what the taxpayer reported as profit/loss for transactions where the broker reported the profit/loss.

Prior to 2011 it was common practice to summarize a taxpayers long-term and short term transactions and make a single long-term and single short-term entry on the old version of Schedule D saying “see attached” in description block and including the broker’s statement of long-term and short-term gains and losses with the return filing. Under this new regimen this is longer possible because brokerage firms are not segregating the transactions into the required categories in reports they provided to their clients.

This has created a reporting nightmare for taxpayers with significant numbers of transactions during the year (typically managed accounts) where the transactions can run in the hundreds. These taxpayers or their tax preparer are faced with entering every transaction on the tax return in order to accomplish the required segregation, which is time consuming and expensive.

Although not a perfect solution, many tax software products will import stock transactions from a spreadsheet and most brokerage firms will provide a spreadsheet of the transactions upon request. Once loaded each transaction coded as to whether the 1099-B included the cost basis or not. Most brokerage accounts use the term “covered” to designate transaction where they report basis and “uncovered” where they didn’t.

If all that is not enough, the reporting process is complicated where the securities traded were acquired by gift or inheritance. Special adjustments are also required for wash sales and when sales can be attributed to a prior purchase of the same security.

There is little chance the IRS will change the new reporting requirement since they feel a significant number of taxpayers overstate the tax basis of their sales and this this new reporting requirement was designed to counter that practice. So, hopefully, the brokerage firms will come to realize the needs of their clients and adjust their reporting to simplify the process for their clients.

Now that the IRS has profit or loss matching capabilities, it is important to correctly report the transactions as the IRS expects to see them. Failure to do so could lead to correspondence audits or even face-to-face audits.

Please call this office if you have questions relating to reporting your security sales this year.