Our priorities shift throughout our lives. Early in the life cycle, home ownership is a priority; that is usually followed by raising and educating children. However, as retirement approaches, the focus needs to shift toward retirement funding. By the time most people are 45 or 50, their children are on their own, the mortgage is close to being paid off, and there is more discretionary income to set aside for retirement.

If you are starting to think about retirement, there are three pitfalls you need to avoid: (1) retiring on your birthday instead of your bank account, (2) not properly managing your risk and (3) retiring with too much debt.

One way to get your retirement funding started is by making tax-advantaged IRA contributions. Self-employed individuals can make tax-advantaged Simplified Employee Pension (SEP) plan contributions. You still have time to make an IRA and/or SEP contribution for 2011.

Generally, after the close of the year you can no longer take steps to alter the outcome of your tax return. However, both IRA contributions and SEP contributions can be made for 12 months after the year has closed, and if you converted a traditional IRA into a Roth IRA, you can undo that conversion after the close of the year. Here are the details:

IRA Contributions – IRA contributions (tax-deductible and non-deductible) for 2011 can be made up to and including the un-extended filing due date for your 2011 tax return, which is April 17, 2012. The maximum contribution allowed is $5,000 ($6,000 if age 50 or over) for each taxpayer. The annual maximum must be allocated between traditional and Roth IRA contributions.

If you are an active participant in an employer-sponsored plan, the IRA contributions are phased out for higher-income taxpayers. Roth IRA contributions are also phased out. The traditional IRA AGI phase-outs for 2011 are between $90,000 and $110,000 for married individuals filing jointly and individuals qualifying as a surviving spouse, $56,000 and $66,000 for unmarried individuals, and $0 to $10,000 for married individuals filing separately.

Where one spouse participates in an employer plan but the other does not, the non-participating spouse’s phase-out is between $169,000 and $179,000 for 2011.

SEP Plan Contributions – SEP plans are tax-deductible retirement plans for self-employed individuals. Contributions can be made up to and including the extended due date, which for the 2011 tax return is October 15, 2012. The maximum annual contribution to a SEP plan is the lesser of “25% of compensation” (20% of net profit after deducting the SEP contribution for the self-employed proprietor’s contribution) or $49,000. SEP plans have no AGI phase-out limitations and no catch-up contributions for older individuals.

Other Plans – Other plans such as Simple Plans and Keogh plans also permit contributions in 2012 for 2011.

For additional information related to making retirement plan contributions after the close of the tax year, please give this office a call.

Among the areas of underreporting are:

• Personal Expenses – Over-deductions attributable to the inclusion of non-deductible personal expenses and the failure to allocate for personal use of a vehicle.
• Underreporting Income – Failure to include all income. To counter this problem, the IRS has initiated merchant card and third-party reporting that will provide the IRS with all income from credit card sales.
• Worker Misclassification – Misclassifying workers as independent contractors instead of treating them as W-2 employees, thereby avoiding the employer’s share of payroll, unemployment, and other taxes. The IRS currently has a Voluntary Classification Settlement Program in effect that allows eligible taxpayers to voluntarily reclassify their workers for federal employment tax purposes. Voluntary programs usually precede more aggressive compliance measures.
• Failing to Issue Information Returns – Generally, businesses are required to issue 1099s for fees they pay to individuals other than employees or to corporations. This is a huge area of non-compliance that denies the IRS the ability to ensure that payees are properly reporting their income. In an audit in which a 1099 should have been issued and was not, the IRS will generally disallow the deduction for those services. The 2011 Schedule C asks two catch-22 questions: “Did you make payments that would require you to file a Form 1099?” and “If yes, did you or will you file all required Forms 1099?”
• Hobby Losses – Some businesses are actually hobbies, where there is no real intention of ever making a profit. Businesses deemed to be hobbies have special rules that limit the expense deductions to the income and require the deductions to be taken as itemized deductions on Schedule A. Watch for a future article on hobby losses that will appear in the March newsletter.

If you have questions related to your Schedule C or any of the issues in this article, please give this office a call.

Determining Basis – Generally, your tax basis is what you originally paid for the item, assuming that you can recall the amount. It may be difficult to remember how much you paid for an item; however, if the cost was significant, you hopefully have documentation that can verify the price. Without documentation, you are at the mercy of the IRS should you be audited! Even more complicated is determining the value of an item acquired as a gift. Your tax basis for a gift generally is the same basis as it was for the item in the hands of the individual who gave you the gift. Meanwhile, the basis for an item acquired by inheritance is generally the fair market value of the item on the date of the inheritance. As you can see, simply determining the basis for the items that you sold can be complicated.

Types of Items Sold – Not all items are taxed the same. The percentage depends on whether the item was held for personal use or for investment purposes and whether or not the item is classified as a collectible. A higher maximum tax rate applies to collectibles than to other capital assets.

• Jewelry – Generally, jewelry that is held for personal use is excluded from the definition of collectibles and is taxed the same as any other personal use property. Losses are, thus, not allowed and gains are taxed as either short-term or long-term capital gains. For the most part, jewelry that an individual may choose to sell will have been owned for over a year and the gain will be taxed at the long-term rate, which, for 2011 is a maximum of 15% (0% to the extent that the taxpayer is in the 15% regular tax bracket or lower). Beware, however, as some jewelry may include gold or silver coins that are considered collectible items and, thus, may be taxed at a higher rate, as explained below.
• Collectibles – Gold and silver coins and bullion are included on the IRS’s list of collectibles. Unlike jewelry, the sale of “collectibles” can result in either a taxable loss or a taxable gain. In addition, collectible gains are taxed at a maximum rate of 28%, as opposed to a maximum of 15% for other capital assets that are held long-term. The maximum rate does not imply that all collectible gains are taxed at 28%. A taxpayer in a lesser tax bracket will be taxed at that lesser rate.

If you have questions related to selling jewelry and collectibles, please give the office a call.

The Internal Revenue Service receives thousands of reports each year from taxpayers who receive suspicious e-mails, phone calls, faxes, or notices claiming to be from the IRS. If you find something suspicious, you should immediately call this office before responding. In fact, it is a good policy to check with this office before responding to any inquiry from the IRS or state or local tax agencies.

Here are some tips you should know about phishing scams.

1. The IRS never asks for detailed personal and financial information like PIN numbers, passwords, or similar secret access information for credit card, bank, or other financial accounts.

2. The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. If you receive an e-mail from someone claiming to be a representative of the IRS or directing you to an IRS site:

• Do not reply to the message.
• Do not open any attachments. Attachments may contain malicious code that will infect your computer.
• Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, you may have compromised your financial information. If you entered your credit card number, contact the credit card company for guidance. If you entered your banking information, contact the bank for the appropriate steps to take. The IRS website provides additional resources that can help. Visit the IRS website  and enter the search term “identity theft” for additional information.

3. The address of the official IRS website is www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site.

4. If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS but you suspect he or she is not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious e-mail to phishing@irs.gov.

If you have any questions or doubts related to a letter, phone call, or e-mail from the IRS or other taxing authorities, please call this office before responding or providing any financial or personal information. Better safe than sorry!

Specified foreign financial assets include financial accounts maintained by foreign financial institutions and other investment assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counterparties that are non-U.S. persons, and interests in certain foreign entities. However, no disclosure is required for interests that are held in a custodial account with a U.S. financial institution.

The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, there are additional penalties of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.

To the extent the IRS determines that the individual has an interest in one or more foreign financial assets but doesn’t provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 (or other applicable reporting threshold amount) for purposes of assessing the penalty.

No penalty will be imposed if the failure to file the 8938 is due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information isn’t reasonable cause.

In addition, if it is shown that the individual failed to report the income from the foreign financial account on his or her income tax return, a 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset.

If you have questions related to this issue or are uncertain as to whether you are required to file Form 8938, please give this office a call to discuss your particular situation.

The Earned Income Tax Credit (EITC) is for people who work, but have lower incomes. If you qualify, it could be worth up to $5,751 for 2011. So, you could pay less federal tax or even get a refund. The credit is a refundable credit, meaning you can receive the benefits of the credit even if you do not owe any taxes. That’s money you can use to make a difference in your life and help carry you through hard times.

The EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. If you have children, they must meet the relationship, age and residency requirements. While taxpayers without children may qualify for the EITC, the potential amount of the credit is significantly more for eligible taxpayers who have one or more qualifying children. These taxpayers are also allowed to earn over 2½ times more income before the credit is phased out than are workers without qualifying children.

If you were employed for at least part of 2011, you may be eligible for the EITC based on these general requirements:

The credit calculation is rather complicated and takes into account a taxpayer’s income from working, his or her total income (AGI), number of children and tax filing status. This credit is zero if a taxpayer has no income from working (the credit is devised as an incentive for individuals to work) and increases as the income from working increases until the credit reaches the maximum allowed, at which point it becomes smaller as the income grows. The table below shows (1) Maximum Credit and corresponding earned income and (2) the income at which the credit totally phases out.

To qualify, a taxpayer must meet a few basic rules:

• The credit isn’t available to individuals when their “disqualified income” (i.e., investment income such as interest and dividends) is more than $3,100.
• The taxpayer claiming the credit, and any qualifying children, must have a valid Social Security Number.
• The taxpayer must have earned income from employment or from self-employment.
• Filing status cannot be married filing separately.
• The taxpayer must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
• The taxpayer cannot be a qualifying child of another person.
• A taxpayer without a qualifying child must: o Be age 25 but under 65 at the end of the year, o Live in the United States for more than half the year, and o Not be a qualifying child of another person.
• The taxpayer cannot file Form 2555 or 2555-EZ (related to foreign earned income).
• Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If the election to do so is made, all nontaxable combat pay received must be included in earned income for purposes of figuring the EITC.

The rules related to EITC are rather complicated, and the IRS requires a great deal of information to substantiate qualification. The IRS places due diligence requirements on tax preparers, which are associated with severe penalties. So if this is the first time you have qualified for the credit through this tax preparation firm, you may need to provide information not normally required to prepare your return.

If you have any questions related to how the credit might apply to you, please give this office a call.

The most commonly encountered nominee situations include when you have a joint bank account or brokerage account with someone other than your spouse and all the income from those accounts are reported under your SS number. You will need to issue the IRS and your joint account owner a 1099 reporting the co-owner’s share of the income under his or her social security number. Then, when you file your return, you show all of the income but back out the co-owner’s share as “nominee amount.”

The type of 1099 depends upon the type of income: 1099-INT for interest, 1099-DIV for dividends and 1099-B for the proceeds from selling stocks and bonds.

Forms 1099-INT and 1099-DIV that you issue as a nominee are supposed to be given to the recipients by January 31, while the deadline for giving Forms 1099-B to the other owner(s) is February 15. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28. The 1099s must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS along with the required 1096 transmittal form. This service provides recipient and file copies for your records.

If you have questions, please call this office.

1. Contact this office – Let us know you are missing a W-2. If your appointment is in the near future, we will advise you whether to keep the appointment or change it to another time. Most payroll services provide year-to-date totals of income and withholding with each paycheck, so your final paycheck for the year will probably include all the data needed to prepare your return, and you can still keep your tax appointment. Even if you do not have the year-to-date totals for a missing W-2 or 1099, it is best to keep the appointment. Everything else for the return, except for the missing document, can be completed, and you can mail or drop the missing items by the office at a later date. That way, your return can be finished as soon as the W-2 or 1099 is available. This will speed up your refund if you are receiving one.

2. Contact your employer – If you have not received your W-2, the first step is to contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for them to resend or to issue the W-2.

3. Contact the IRS – If you still do not receive your W-2 by February 15, you can contact the IRS for assistance at 800-829-1040. However, we recommend that you hold off from contacting the IRS until you are certain that you will not be receiving a W-2 from the employer, even at a date substantially later than February 15. If, and when, you do call the IRS, have the following information at hand:

• Employer’s name, address, city, and state, including zip code;
• Your name, address, city, and state, including zip code, and your Social Security number; and
• An estimate of the wages you earned, the federal income tax withheld, and the period you worked for that employer. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible. This office can assist you in making the estimate.

4. File your return – Even if you don’t receive a W-2, you still must file your tax return or request an extension to file by April 17.

• If you anticipate that you will ultimately receive the missing W-2, this office can estimate your 2011 tax liability and file extensions for you. If you have a substantial refund coming, you may opt to have this office prepare a substitute W-2, and you can file without the W-2. Refunds for returns including substitute W-2s can be delayed significantly while the IRS verifies the W-2 information.
• If you don’t anticipate receiving the missing W-2, then a substitute W-2 can be prepared, allowing you to file your 2011 tax return.

If a substitute W-2 is used and it is later determined that the information used to prepare the substitute W-2 was in error, an amended return may have to be prepared for you to file.

Please call this office if you have any questions.

It is not uncommon to have a repairman out early in the year, pay him less than $600, and then use his services again later and have the total for the year exceed the $600 limit. As a result, you overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9s for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.

IRS Form W-9, Request for Taxpayer Identification Number and Certification is provided by the government as a means for you to obtain the data required to file the 1099s from your vendors. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 prior to engaging in business with them. The form can either be printed out or filled onscreen and then printed out. The W-9 is for your use only and is not submitted to the IRS.

In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2012. This must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides recipient and file copies for your records. Use the worksheet to provide us with the information we need to prepare your 1099s.

Please attempt to have the information to this office by January 20, so that the 1099s can be provided to the service providers by the January 31st due date.

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

• Is there is a requirement to file?
• Should the taxpayer file even when there isn’t a requirement to file?

The answers to these two questions are quite different. You must file a tax return if your income is above a certain level. The amount varies depending on your filing status, age, and the type of income you receive. Different filing thresholds may apply for federal and state purposes. The table below illustrates the general filing requirements based on age and income for 2011.

For example, for 2011, a married couple both under age 65 generally are not required to file a federal return until their joint income reaches $19,000. However, self-employed individuals generally must file a tax return if their net income from self-employment was at least $400. There are special rules for children or other individuals who are, or could be, claimed as a dependent by someone else.

Even if you don’t have to file a federal return, here are six reasons why you may want to file:

• Federal Income Tax Withheld. If you are not required to file, you should file to get money back if federal income tax was withheld from your pay, if you made estimated tax payments, or if you had a prior year overpayment applied to this year’s tax.
• Earned Income Tax Credit. You may qualify for the Earned Income Tax Credit, or EITC, if you worked but did not earn a lot of money. EITC is a refundable tax credit, meaning you could qualify for a tax refund.
• Additional Child Tax Credit. This credit may be available to you if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.
• Refundable Education Credit. Forty percent of the American Opportunity Credit may be refundable (excess over the tax liability can result in a refund).
• Claimed or Carried-over Tax Credits
• Claimed or Carried-over Losses

If in doubt, please call this office to see if you are required to file or should file a tax return for 2011.