Tax filing begins Mid-February for few Taxpayers

Tax filing that normally would start first or second week of January has been delayed this year. The delay is to update and program the tax breaks included in a compromise tax bill President Obama signed last week into the IRS tax system.

People claiming any of these three items — involving the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction as well as those taxpayers who itemize deductions on Form 1040 Schedule A — will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid- to late February.

This delay means millions of taxpayers will have to wait longer to get their refunds next year.

2011 Tax Benefits - Inflation Adjustments

Following inflation adjustments relate to the tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17 -

• Personal & Dependent Exemption increased to $3700
• Standard Deduction increased to $11,600 for MFJ, $5800 for Single and MFS, $8,500 for HOH. Additional standard deduction for blind people and senior citizens increased to $1,150 for MFJ and $1,450 for singles and HOH.
• Tax-bracket thresholds increase for each filing status.
• Maximum earned income tax credit(EITC) for low and moderate income workers and working families increased to $5,751. The maximum income limit for EITC increased to $49,078.
• Modified adjusted gross income threshold for lifetime learning credit begins to phase out at $102K for MFJ and $51K for singles and HOH.

HSA & FSA - Allows Prescribed OTC medicines & Drugs

Notice 2010-59 issued by the IRS on September 3rd, 2010 provides guidance on use of HSA & FSA accounts to pay for over-the-counter medicines and drugs.

As per the rules, beginning January 1, 2011, over-the-counter medicines and drugs will only be reimbursable from these plans if the individual obtains a prescription. The new rules clarify that a "prescription" means a written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred and that is issued by an individual who is legally authorized to issue a prescription in that state.

Online Registration System for Paid Tax Return Preparers

All compensated tax return preparers are required to register under the new registration system and get a PTIN before preparing returns in 2011. Individuals who currently possess a PTIN will need to reapply under the new system but generally will be reassigned the same number.

Registration fee is $64.25, regardless of whether you currently possess a PTIN or not. Attorneys, Certified Public Accountants (CPAs), and Enrolled Agents (EAs) are not exempt.

Link to the New Registration System

Paid Preparers should apply for or renew their PTINs before January 1st, 2011.

Small Business Jobs Bill of 2010 (HR-5297)

The Senate passed the Small Business Jobs Act of 2010. The House is set to vote on the bill where its expected to pass.

The following provision is included in the Bill...

1. One-year extension of the 50-percent bonus depreciation provision for qualified property placed in service during 2010.

2. Increase Section 179 expense deduction for 2010 and 2011 to $500,000, combined with an increase in the phase out threshold to $2 million.

Will keep you posted on the developments....

Late filing Penalty for S Corp

Time is running out and the tax returns for S Corporation are due soon.
The final deadline to file S Corp tax returns (Form 1120S) is September 15th, 2010 if an extension was requested.

S Corporation's no longer enjoy the luxury to file late and not pay the penalty. One of the recent changes by the IRS is charging penalty on late filing of the S Corporation tax returns.

For tax years beginning after 2009, the late filing penalty for an S corporation return is $195 for each month or part of a month (up to 12 months) the return is late (or does not contain the required information) multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation's tax year

So for a S Corp with two or more stockholders this penalty could add up to an exhorbitant amount.

Relief from penalty is available only if the S Corp shows that the late filing was due to reasonable cause.

Late Filing Penalty for Partnership

Time is running out and the tax returns for partnership are due soon.
The final deadline to file partnership tax returns (Form 1065) is September 15th, 2010 if an extension was requested.

Partnership no longer enjoy the luxury to file late and not pay the penalty.

For tax years beginning in 2009, the late filing penalty for a partnership return is $89 for each month or part of a month (up to 12 months) the return is late (or does not contain the required information) multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year.

For tax years beginning after 2009, the late filing penalty for a partnership return is $195 for each month or part of a month (up to 12 months) the return is late (or does not contain the required information) multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year.

So for a partnership with two or more partnership this penalty could add up to an exhorbitant amount.

Relief from penalty is available only if the partnership shows that the late filing was due to reasonable cause.

Early Distribution from Retirement Plan & Taxes

Considering the current economic conditions, most of us are turning to our retirement funds for financial needs. However, we need to be aware of the tax consequences that may follow with such distributions.

Since the contributions to these plans are made from our before tax dollars (I have excluded Roth contributions/plans from the discussion here), the distributions when taken out will be fully taxable. In addition,the law imposes a 10% additional tax on early distributions from a qualified retirement plan or deferred annuity contract before reaching age 59 1/2. Whereas you cannot get out of the resulting tax liability, you may be able to save the early withdrawal penalty.

There are certain exceptions to 10% early withdrawal penalty.

The following six exceptions apply to distributions from any qualified retirement plan:

1. Distributions made to your beneficiary or estate on or after your death.
2. Distributions made if you are are totally and permanently disabled.
3. Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.
4. Distributions that are equal to or less than your deductible medical expenses, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income.
5. Distributions made due to an IRS levy of the plan.
6. Distributions to qualified reservists.

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

1. Distributions made to you after you separated from service with your employer (State or local government), if the separation occurred in or after the year you reached age 55 or distributions from qualified governmental defined benefit plans if you were a qualified public safety employee who separated from service on or after you reached age 50,
2. Distributions made to an alternate payee under a qualified domestic relations order(QDRO), and
3. Distributions of dividends from employee stock ownership plans.

Affordable Care Act & Health Care

Employer-Provided Health Coverage — Not Taxable
Starting in tax year 2011, the Affordable Care Act requires employers to report the value of the health insurance coverage they provide employees on each employee's annual Form W-2. This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee's income and it is not taxable.

Small Business Health Care Tax Credit
This new credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

Health Coverage for Older Children
Health coverage for an employee's children under 27 years of age is now generally tax-free to the employee. It applies to various work place and retiree health plans. These changes allow employers with cafeteria plans to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.

Tax Tip - Review your 2009 Tax Return to determine the need to Amend the Return.

If you forgot to include some income or to take a deduction or to claim a credit(including the first time homebuyer or repeat homebuyer credit) on your tax return – you can correct it by amending your tax return.

Generally, to claim a refund, you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.

Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040, 1040A or 1040EZ. Be sure to check the box for the year of the return you are amending on the Form 1040X, Line B. The newly revised Form 1040X (Rev. January 2010) has only one column used to show the corrected figures and an area on the front of the form where you explain why you are filing Form 1040X.

Closing Deadline Extended - Eligible Homebuyer Credit

Eligible taxpayers who contracted to buy a home, qualifying for the first-time homebuyer credit, before the end of April now have until Sept. 30, 2010 to close the deal.

The Homebuyer Assistance and Improvement Act of 2010, signed by the President, extended the closing deadline from June 30 to Sept. 30 for any eligible homebuyer who entered into a binding purchase contract on or before April 30 to close on the purchase of the home on or before June 30, 2010.

Time is running out for all those who can benefit from IRA conversion in 2010

Beginning in 2010, the rules for conversions of traditional IRA money to a Roth IRA are changing by eliminating the MAGI limitations and hence, making more investors eligible to convert their traditional IRAs to Roth IRAs.

However, look before you leap....just because you can convert to a Roth IRA doesn't necessarily mean that you should.
First of all, you need to evaluate if you should convert the traditional IRA to Roth. There are various factors to consider including the age to retirement, your income source at retirement, your need for funds, tax rates in future and appreciation expected in these accounts.

If you are already retired and over 59 1/2 years than you can take distribution over a period of time and spread the taxes over a number of years.

Higher your tax bracket, the more tax you will have to pay on conversion. But if you expect taxes to go up in the long term, conversion will make sense as you may have to pay a higher tax rate on these distributions later.

Also to note is the special tax treatment for Roth IRA conversions available for 2010 which allows taxpayers to spread the taxes due on the conversion over two years and thus making the tax burden much easier to handle by requiring only one-half of the taxes to be paid during 2011 and the other half of the Roth conversion taxes to be paid in 2012.

Feel free to contact for a detailed evaluation considering your financials facts and long term goals.

One-Time Special Filing Relief Program for Small Charities

Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file required returns for 2007, 2008 and 2009 can preserve their status by filing returns by Oct. 15, 2010, under a one-time relief program.

The relief announced is not available to larger organizations required to file the Form 990 or to private foundations that file the Form 990-PF.

Fees for Preparer Tax Identification Numbers

IRS released proposed regulations that would establish a fee for individuals who apply for a preparer tax identification number (PTIN).

The proposed regulations (REG-139343-08) would establish a fee of $50, payable to the IRS, to cover technology costs, as well as compliance and outreach efforts associated with the new PTIN program. The proposed regulations would also provide for an additional fee (expected to be substantially lower than $50) to be charged by the third-party vendor chosen to operate the new online system. That fee amount is expected to be announced soon, as well as additional details about the launch of a new online application system. These fees could change in future years as program costs are reevaluated.

Click the link to find more details on Oversight of Federal tax return preparation

Estate tax to return in 2011

Estate tax is repealed for the tax year 2010. So everyone inheriting in 2010 can look forward to a hefty inheritance due to a big estate tax saving.

Good things don't last long and speculations are on that federal estate tax will come back. Only fact unknown is what will be the exemption amount.

Many believe that the the Federal estate tax is scheduled to return on Jan. 1, 2011, imposing a levy of up to 55% on estates valued at more than $1 million. However, a $1 million exemption would affect a lot of families considering the fact that cost of living and property values have gone up from what it was 8 to 10 years ago.

Considering the current economic conditions it seems reasonable to enact the estate tax to its 2009 level, with a $3.5 million exemption and a 45% rate on assets that exceed that amount, But, whether it will be approved at this level is what the future will tell....

Small Business Health Care Tax Credit

Small businesses can avail of the health care tax credit beginning 2010.

Eligibility.
To be eligible for the tax credit-
• A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
• A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
• A qualifying employer must pay average annual wages below $50,000.
• Both taxable (for profit) and tax-exempt firms qualify.

Maximum Amount.
The credit is worth up to 35 percent of a small business' premium costs in 2010. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers).

Phase-out.
The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

2010 Florida Tax Amnesty Program

Florida's tax amnesty program is an opportunity for taxpayers to voluntarily pay overdue taxes with no penalty and reduced interest. Florida's Tax Amnesty Days start July 1 and end on September 30, 2010.

All taxes administered by the Department of Revenue are eligible, except unemployment tax and Miami-Dade County Lake Belt Fees.

Taxpayers eligible for amnesty are ones with liability for tax, penalty, or interest due before July 1, 2010 and:

•have completed a Tax Amnesty Agreement.
•have liability not already covered by a settlement or payment agreement.
•are not under criminal investigation, indictment, information, or prosecution regarding a Florida revenue law.
•are not under a pretrial intervention or diversion program, probation, community control, or in a work camp, jail, state prison, or another correctional system regarding a Florida revenue law.

2010 Sales Tax Holiday

Just in time for Back to School Shopping.....

Florida law directs that no sales tax or discretionary sales surtax will be collected on sales of books, clothing, footwear, and certain accessories selling for $50 or less, or on certain school supplies selling for $10 or less. This three-day tax exemption is in effect from 12:01 a.m., Friday, August 13, 2010, through midnight, Sunday, August 15, 2010.

The sales tax exemption applies to each eligible book or item of clothing selling for $50 or less and to each eligible school supply item selling for $10 or less. The exemption will still apply no matter how many items are sold on the same invoice to a customer as the limit is applicable on a per item basis.

Education Tax Break for 2009 & 2010

The American Recovery and Reinvestment Act (ARRA) allows for the American Opportunity Credit, to pay for college expenses.

The American Opportunity Credit modifies the existing Hope Credit for tax years 2009 and 2010, making the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits.

Haiti Earthquake Relief -Donate Now and Claim Deduction in 2009

People who contribute in 2010 to charities providing earthquake relief in Haiti can take a tax deduction for the contribution on their 2009 tax return instead of their 2010 return. This means you can receive an immediate tax benefit, rather than having to wait until you file next year’s return.

Note that only cash contributions made to these charities after Jan. 11, 2010, and before March 1, 2010, are eligible and the contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti.
You may deduct these contributions on either your 2009 or 2010 returns, but not both.

Source: www.irs.gov