FAQ: What is a tax return transcript?

Taxpayers can request a copy of their federal income tax return and all attachments from the IRS. In lieu of a copy of your return (and to save the fee that the IRS charges for a copy of your tax return), you can request a tax transcript from the IRS at no charge. A tax transcript is a computer print-out of your return information.

Tax return copy

A copy of your tax return is exactly that: a copy of the return you filed with the IRS. According to the IRS, copies of individual tax returns are generally available for returns filed in the current year and the past six years. The IRS charges a fee of $57 to send taxpayers a copy of their return.

Requests for copies of tax returns should be filed on Form 4506, Request for Copy of Tax Return. The IRS has advised on its website that taxpayers should allow 60 days to receive a copy of their tax return.

Tax return transcript

A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules. However, a tax transcript does not show any changes the taxpayer or the IRS made after the return was filed. According to the IRS, a tax return transcript is generally available for the current and past three years.

Taxpayers can request transcripts online at the IRS web site, telephoning the IRS, or filing Form 4506T-EZ, Short Form Request for Individual Tax Return Transcripts. Businesses that need business-related information should file Form 4506-T, Request for Transcript of Tax Return. Taxpayers can request that the IRS send the transcript to their tax representative. The IRS reported on its website that transcript requests made online or by telephone generally will be processed within five to 10 days; transcript requests made by filing a paper form take longer to process.

Tax account transcript

The IRS also can provide a tax account transcript.  This document shows basic data from the individual's return and includes any adjustments the taxpayer or the IRS made after the return was filed. A tax account transcript is generally available for the current and past three years, according to the IRS and is provided at no-cost.

If you have any questions about the types of tax records available from the IRS, please contact our office.

How do I?... Claim the adoption tax credit

Adoptive parents may be eligible for federal tax incentives. The Tax Code includes an adoption tax credit to help defray the costs of an adoption.  Recent changes to the adoption tax credit make it very valuable.

Temporary increase

In 2010, Congress temporarily increased the dollar limitation for the adoption tax credit (and the income exclusion for employer-provided adoption expenses) by $1,000 (from $12,170 to $13,170 for 2010 and indexed for inflation for tax years beginning after December 31, 2010). Congress also made the adoption tax credit refundable for 2010 and 2011. These enhancements, however, are scheduled to expire after December 31, 2011 unless Congress extends them.

Your income is another factor to take into account. You may not receive the full amount of the adoption tax credit for 2010 if your modified adjusted gross income (MAGI) is $182,520 or more. The adoption tax credit is completely phased out if your MAGI is $222,520 or more. These amounts may be adjusted for inflation by the IRS in 2011. Additionally, to prevent double benefits, the adoption tax credit is coordinated with the exclusion for employer-provided adoption assistance

Qualified expenses

A number of adoption-related expenses may qualify for the tax credit. These expenses include, but are not limited to, reasonable and necessary adoption fees, travel expenses, fees paid to attorneys, and court costs. The IRS has identified on its website some expenses that are excluded, such as expenses related to the adoption of the child of a taxpayer's spouse, the costs of a surrogate parenting arrangement, and expenses that violate state or federal law. Additionally, expenses related to a foreign adoption qualify only if the taxpayer actually adopts the child. That rule is different if a domestic adoption is unsuccessful.

Eligible child

An eligible child for purposes of the adoption tax credit is an individual who has not attained the age of 18 at the time of the adoption, or is physically or mentally incapable of caring for himself or herself. A child has special-needs if the child otherwise meets the definition of eligible child, the child is a U.S. citizen or resident, a state determines that the child cannot or should not be returned to his or her parent's home, and a state determines that the child probably will not be adopted unless assistance is provided. 

Form 8839

Taxpayers file Form 8839, Qualified Adoption Expenses, to claim the adoption tax credit. At this time, Form 8839 cannot be filed electronically; it must be filed on paper because the IRS requires you to attach supporting documentation.

The IRS requires different documents if the adoption is foreign or domestic, final or not final, and if the adoption is of a child with special needs. The IRS has issued special safe harbor rules for certain foreign adoptions. The home country of the child may be included in the safe harbors which streamline some of the documentation requirements.

The IRS recommends that taxpayers keep the following records: Receipts for qualified adoption expenses, final decree, certificate or order of adoption, home study by an authorized placement agency, child placement agreements or court orders, and determination of special needs status by a State or the District of Columbia.

Processing Form 8839 can take some time. One of the most common mistakes taxpayers make is failing to attach supporting documents.  After the IRS conducts an initial review of Form 8839, it notifies taxpayers explaining any additional steps they need to take, such as providing certain documentation to establish whether they are eligible for the credit.

If you have any questions about the adoption tax credit, please contact our office.

Back-to-school look at education tax benefits

The start of the school year is a good time to consider the variety of tax benefits available for education. Congress has been generous in providing education benefits in the form of credits, deductions and exclusions from income. The following list describes the most often used of these benefits.

Exclusion From Income

Scholarships. A student enrolled in an educational program may receive a scholarship or fellowship to pay for all or part of the student's tuition and fees. These amounts are not included in the student's (or the parent's) income. Need-based education grants, such as a Pell Grant, and tuition reductions are also excluded from income. However, amounts paid for work on campus may be taxable as compensation for services. Payments to cover room and board as opposed to tuition are also subject to tax.

Loan cancellation. Most students take out loans to pay for education expenses. Normally, if a debt is cancelled, the debtor has taxable income. However, if a student loan is canceled or reduced, the cancelled amount is not included in income.

Employer assistance. If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. Courses do not have to be related to your job. If they are related, further tax benefits may be available.

Education plans. Generally, amounts paid to establish an education plan, account or savings bond are not deductible. However, income on the account can grow tax-free (unlike a bank account, for example), and distributions of income from the account are not taxable if they are used for tuition and other qualified education expenses. These general rules apply to a Coverdell Education Savings Account (an education IRA), a qualified tuition program (QTP or "529 plan"), and certain U.S. savings bonds. In the last category or Series EE bonds issued after 1989 and Series I bonds. A qualified tuition program is established by a state and may provide payments for prepaid tuition or an account with tax-free earnings.

Tax Credits

LLC and AOTC. A lifetime learning credit (LLC) of up to $2,000 is available education expenses for a dependent for whom you claim an exemption. More recently, parents can claim an American Opportunity Tax Credit (AOTC) of up to $2,500 for college expenses paid for each eligible student. The current, enhanced level of the AOTC is scheduled to expire at the end of 2012, but the Obama administration has asked Congress to make it permanent. 

Dependent care. Parents can take a credit for dependent care expenses paid so that they can work. Expenses for care do not include amounts paid for education. Expenses for a child in nursery school, pre-school, or similar programs for children below the level of kindergarten are expenses for care. Expenses to attend kindergarten or a higher grade are not expenses for care. However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be expenses for care, so that a credit can be claimed.

Deductions

Some deductions can be taken directly against gross income, in determining adjusted gross income. These are adjustments to income or "above-the-line" deductions. Other deductions can only be taken as an itemized deduction. An above-the-line deduction is more valuable.

Above-the-line. Tuition expenses of up to $4,000 can be deducted directly against income. Tuition that also qualifies for one of the education tax credits, however, can be used only once, either for a credit or this above-the-line deduction. Ordinarily, interest paid is a nondeductible personal expense (other than home mortgage interests). However, interest paid on a student loan interest is deductible and can also be taken as an adjustment to income.

Itemized. Not all education-related expenses are deductible. However, a taxpayer may be able to claim a deduction for the expenses paid for your work-related education. The deduction will be the amount by which qualifying work-related education expenses exceed two percent of adjusted gross income. These expenses are added to other itemized deductions, to determine whether the taxpayer will itemize or claim the standard deduction.

Gift tax

Generally, a person making a gift must pay gift tax if the gift exceeds a specified amount ($13,000 currently). However, tuition paid directly to an educational institution to cover tuition for someone else's benefit (e.g. a grandchild) is not taxable gift irrespective of amount. Prepaid tuition plans can qualify for this benefit.

A variety of educational benefits are available. In some cases, a deduction or a credit (but not both) may be available for the same payment. Thus, it is important to determine the exact requirements for each benefit and the amount of the benefit. Our office can help you determine how to maximize these benefits.

Identifying investment-related issues from fluctuating markets

With the stock market fluctuating up and down (but especially down), some investors may decide to cash out investments that they initially planned to hold.  They may have taxable gains or losses they did not expect to realize. Other investors may look to diversifying their portfolios further, moving a more significant portion into Treasury bills, CDs and other "cash-like" instruments, or even into gold and other precious metals. Here are reminders about some of the tax issues involved in these decisions.

Capital Assets and Dividends

Capital assets. Most items of property are capital assets, unless they are inventory or are used in a trade or business. Stock and securities are capital assets. Gains and losses from a capital asset are short-term if the property is held for one year or less, with gains taxed at ordinary income rates and deductible losses (short- or long-term) limited to $3,000 annually. Long-term gains (from property held more than one year) are generally taxed at a 15 percent rate.

Stock and securities. For stock and securities traded on an established market, the holding period begins the day after the trade (purchase) date and ends on the trade (sale) date. The settlement date, which is a few days later, is not relevant to the holding period determination.

Precious metals. The maximum capital gains rate on collectibles is 28 percent, rather than 15 percent. Collectibles include gems, coins, and precious metals, such as gold, silver or platinum bullion. If the taxpayer's regular tax rate is lower than the maximum capital gain rate, the regular tax rate applies. Collectibles gain includes gain from the sale of an interest in a partnership, S corp or trust from unrealized collectibles' appreciation, but does not include investments in a non-passthrough entity like holding shares in a mining company operating as a C corporation. Since gold is considered investment property in whatever form held, however, capital loss from a sale of gold (if a loss can be imagined) would be deductible.

Dividends. If a dividend is declared before the stock is sold but paid after the sale, the payee or owner of record when the dividend was declared is taxable on the dividend. Dividends are qualified (and taxed at the lower 15 percent rate) if the stock is held for at least 61 days during the 121-day period that begins 60 days before the "ex-dividend" date (the first date on which the buyer is not entitled to the next dividend payment). Again, the holding period includes the day the stock is disposed of but does not include the purchase date.

Wash sale rules. Taxpayers cannot deduct losses from a wash sale. A wash sale is a sale of stock or securities preceded or followed by a purchase of identical stock or securities within 30 days of the sale. A purchase includes a purchase by the taxpayer's IRA. Thus, taxpayers cannot cash in a loss while, in effect, retaining the investment. The holding period for a wash sale begins when the old stock or securities were acquired. The loss that is disallowed is added to the basis of the stock or securities purchased.

Interest Income

Treasury securities. T-bills are sold at a discount for terms up to one year. The difference between the discounted price and the face value received at maturity is interest. Most U.S. Treasury bonds or notes pay interest every six months. The interest is taxable when paid. Certain issues of U.S. Treasury bonds can be exchanged tax-free for other Treasury bonds.

Corporate bonds. If a taxpayer sells a corporate bond between payment dates, part of the price represents accrued interest and must be reported as interest. 

Certificates of deposit. For short-term CDs (one year or less), interest may be payable in one payment at maturity. Interest is generally taxable when paid or when not subject to a substantial penalty. If interest can only be withdrawn by paying a penalty, the interest may not be taxable as it accrues. A taxpayer that decides to cash out the CD must report the full amount of interest paid, but the penalty is separately deductible and can be deducted in full even if it exceeds the interest.

Savings bonds. A cash-basis taxpayer does not report the interest (or the increase in redemption price) until the proceeds are received, the bond is disposed of, or the bond matures. However, a cash-basis taxpayer can elect to report the increase in redemption price each year as current income.

Switching investments. An exchange of mutual funds within the same family is still taxable -- a sale of one fund and a purchase of another. However, investments held in a tax-free account, such as a 401(k) plans or an IRA, can be switched tax-free, unless the owner takes a distribution.

Please contact our office if you have any questions about the tax ramifications of current investment strategies aimed toward responding to changing market trends.

Tax measures large and small await Congressional action

Congress has returned to work after its August recess under a tight deadline to reduce the federal budget deficit and also, possibly, extend some expiring tax incentives. Between now and the end of the year, Congress could enact significant tax reform in a deficit reduction package; or it may take a piecemeal approach. All this Congressional activity contributes to uncertainty in tax planning.

Joint committee's task

On August 2, 2011, President Obama signed the Budget Control Act of 2011 (P.L. 112-25). Along with cutting approximately $1 trillion in federal spending and raising the federal debt ceiling, the Budget Control Act creates a special a bipartisan joint select committee of Congress to propose more deficit reduction measures.  The Budget Control Act charges the Joint Select Committee on Deficit Reduction with reducing the federal government budget deficit by at least $1.5 trillion over fiscal years 2012 to 2021. If the joint committee cannot agree on deficit reduction measures, or if Congress rejects the committee's proposals, the Budget Control Act provides for automatic cuts over the coming decade.

The12-member joint committee is composed of an equal number of members from both parties: six Democrats and six Republicans. The joint committee must make its proposals, in legislative language, not later than November 23, 2011 (if a majority of the committee agrees on the proposals). Congress must vote on the proposals not later than December 23, 2011.

Flood of proposals expected

The joint committee is expected to be flooded with proposals to reduce the federal deficit. President Obama has urged the joint committee to take a "balanced approach" to deficit reduction. The president has called for reducing the federal deficit through a combination of spending cuts and revenue raisers. Some of the tax provisions mentioned by President Obama for repeal or reform include tax incentives for oil and gas producers and the last-in, first-out (LIFO) method of accounting. President Obama also wants Congress to extend the two percent payroll tax cut, which is scheduled to expire after 2011.

One of the most contentious proposals the joint committee may address is the fate of the Bush-era tax cuts. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act (2010 Tax Relief Act) extended the Bush-era tax cuts through the end of 2012. President Obama wants to extend the Bush-era tax cuts for lower and middle income taxpayers but not for higher income taxpayers (which the White House defines as individuals with incomes over $200,000 and families with incomes over $250,000). It is unclear at this time if the joint committee will take up the Bush-era tax cuts.

The joint committee may look to some recent tax reform proposals for guidance. In 2010, the President's National Commission on Fiscal Responsibility and Reform developed a six-part plan to reduce the federal deficit. The commission recommended reducing or eliminating many tax incentives for individuals in exchange for lower individual income tax rates. The commission also endorsed lowering the corporate tax rate to 26 percent. In July 2011, a bipartisan group of senators, known as the "gang of six," introduced a plan for deficit reduction. The senators' plan would, among other provisions, replace the current individual income tax rate schedule with three new tax brackets along with abolishing the alternative minimum tax (AMT).

Expiring tax provisions

A number of popular but temporary tax incentives (known as "tax extenders) are scheduled to expire after 2011. In past years, Congress has routinely extended many of them. This year may be different. The joint committee could include the tax extenders in its work, extending some but allowing others to expire. Alternatively, the joint committee could decide not to touch the tax extenders. In that case, some or all of them could be extended in separate legislation.

Some of the extenders scheduled to expire after 2011 are (not an exhaustive list):

• Research tax credit
• 15-year recovery for qualified leasehold improvements, restaurant property and retail improvements
• Work Opportunity Tax Credit
• Employer wage credit for activity military reservists
• Indian employment credit and accelerated depreciation for business property on Indian reservations
• Special expensing rules for film and production costs
• Basis adjustment to stock of an S corporation making charitable contributions
• Enhanced deduction for charitable contributions of food inventory, corporate charitable contributions of book inventory and corporate charitable contributions of computers
• Expensing of environmental remediation costs
• Grants for investment in certain energy property in lieu of tax credits
• Income tax credit for alcohol fuels
• Refined coal production facilities credit
• Tax treatment of payments to controlling exempt organizations
• Subpart F exceptions for active financing income

Additionally, one hundred percent bonus depreciation is scheduled to expire after 2011 (except for property with a longer production period). Enhanced Code Sec. 179 expensing ($500,000 maximum amount/$2 million investment ceiling) also is scheduled to expire after 2011.

At this time, September 2011, it is not too early to contemplate how tax reform could impact your planning. Please contact our office and we can schedule a time to review your tax strategy.

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.

The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.

Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.

The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.

The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.

Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.

To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.

The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.

Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

Payroll tax cut

The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.

Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.

Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.

House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.

One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.

Extenders

The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.

President Obama’s FY 2013 proposals

President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.

Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.

On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.

If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

Previous disclosure programs

The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.

Reopened program

The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.

The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.

In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.

The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.

Quiet disclosures

One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.

Critics

The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.

If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Dependency Exemption

In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.

Child Tax Credit

Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.

Child and Dependent Care Credit

If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.

Adoption Credit

Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.

Higher Education Credits

There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.

Extended Health Care Coverage

Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.

Child Care Assistance Credit (for businesses)

Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.

If you have any questions about these provisions and how they may benefit you, please contact our office.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

Offset

If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.

A taxpayer’s refund may be reduced by FMS and offset to pay:

• Past-due child support
• Federal agency non-tax debts
• State income tax obligations, or
• Certain unemployment compensation debts owed a state.

FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.

Form 8379

If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.

The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.

The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

February 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.

February 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.

February 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.

February 10

Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.

February 15

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.

February 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.

February 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.

February 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.

February 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.

March 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.

March 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.

Hiring new employees imposes many burdens on an employer. One of the most important is the collection and filing of Form W-4, Employee's Withholding Allowance Certificate. Mistakes can be very costly to employers and employees. Here's a look at some problems and simple steps employers can take to avoid them.

Hiring new employees imposes many burdens on an employer. One of the most important is the collection and filing of Form W-4, Employee's Withholding Allowance Certificate. Mistakes can be very costly to employers and employees. Here's a look at some problems and simple steps employers can take to avoid them.

Name and social security number

First, an employer should verify the name and social security number submitted on the W-4. The Social Security Administration (SSA) offers a free program to confirm an employee's name and social security number. To request SSA assistance, employers should contact the SSA, provide their employer identification number, and the name and social security number of the employee in question. If the information is inaccurate, the employer should give the employee the opportunity to submit a new form before taking disciplinary action. Employers should also advise the IRS of the incorrect social security number.

Invalid W-4s

Employers must reject a W-4 form if the employer is aware that the form is invalid. This occurs in one of two circumstances: (1) the form has been altered or (2) the employee makes a comment to the employer that the W-4 is inaccurate.

The second scenario includes, for example, a statement by the employee that he or she is claiming to be exempt from withholding because the tax system is unconstitutional or the payment of taxes is voluntary. These claims are wrong and would invalidate the W-4. The employer must reject the W-4 until the employee submits an accurate form. During the interim, the employer must withhold at the highest withholding rate.

The employer also must withhold at the highest rate if an employee fails to submit a Form W-4 unless the employee had previously filed a valid W-4. In that case, the employer should withhold at the rate indicated on the old W-4.

Questionable W-4s

Employers may also be confronted with so-called "questionable" W-4s. An employer must send a copy of Form W-4 to the IRS for verification when the employee is claiming:

--More than 10 allowances; or

--Exemption from withholding if expected wages exceed $200 per week.

In either of these situations, however, the employer is not free to reject the W-4, but must withhold at the rate indicated by the employee until the IRS instructs otherwise. The law presumes that the form, unless "invalid," is accurate until proven otherwise.

Questionable W-4s should be submitted to the IRS with a letter asking the IRS to determine the accuracy of the submission. The letter must include the employer's name, address and EIN.

Caution. Only in the two situations outlined above is the employer required to consider the Form W-4 "questionable." In other questionable cases, there is no obligation to inform the IRS. However, if the IRS deems the reason sufficient to make it "invalid" rather than "questionable" the employer may have been required to withhold taxes at the highest rate rather than at the level indicated on the W-4.

After the IRS conducts an examination, it will send the employer and the employee a "lock-in" letter stipulating the correct rate of withholding. The letter is binding and failure to comply may result in the imposition of civil penalties on the employer. To encourage employees to submit an accurate W-4, employers should remind them that filing a false W-4 may result in a $500 penalty.

If you file a joint return and your taxable income is less than that of your spouse, the "spousal" IRA rules may allow you to contribute up to $5,000 in 2009 (or $6,000 if you are 50 or older) to an individual retirement account (IRA) this year. A "spousal IRA" is a term more commonly used to describe an IRA set up for a nonworking, stay-at-home spouse.

If you file a joint return and your taxable income is less than that of your spouse, the "spousal" IRA rules may allow you to contribute up to $5,000 (or $6,00 if you are 50 or older) to an individual retirement account (IRA) this year. A "spousal IRA" is a term more commonly used to describe an IRA set up for a nonworking, stay-at-home spouse.

Traditional IRA

Individuals under the age of 70 1/2 can make contributions to traditional IRAs. Contributions are deductible and amounts earned in a traditional IRA are not taxed until distributions are made. As an alternative, the contribution may be made to a Roth IRA, in which case it is not deductible (but neither will any qualified withdrawals be taxed later on).

2009 contribution limits

In 2009, the maximum contribution is $5,000. An individual who will be at least 50 years old by the end of the tax year is able to make an additional contribution to an IRA. For 2009, the maximum amount of the catch-up contribution is $1,000.

Impact of employer-sponsored plans on contributions

A spouse's participation in a qualified retirement plan (through an employer or self-employment), affects whether, and how much, the other spouse can contribute to an IRA. The deduction for an IRA contribution is limited if one spouse is an active participant in an employer-maintained retirement plan (an individual is not considered an active participant in an employer-sponsored plan merely because his or her spouse is treated as an active participant).

One participating spouse

An individual spouse can make a deductible contribution to an IRA of up to $5,000 in 2009 (if 50 or older, $6,000). For 2009, the working spouse's ability to take an IRA contribution deduction must be reduced if he or she is an active participant in a plan and the couple's combined AGI falls between $89,000 and $109,000.

The maximum deductible contribution for a nonworking spouse whose husband or wife is an active participant in a retirement plan, phases-out when the couple's combined AGI falls between $166,000 and $176,000. Thus, the deductibility of the nonworking spouse's contribution to an IRA begins to phase-out when the couples' AGI exceeds $166,000, if the working spouse participates in a qualified retirement plan.

Non-participating spouses

When neither spouse participates in a qualified retirement plan both the nonworking spouse and the working mate can make deductible contributions of up to $5,000 to traditional IRAs -- $10,000 in total for 2009 -- regardless of AGI. For example, say the couple's joint AGI is $400,000 from one spouse's self-employment activity. If that spouse has no retirement plan, each spouse can make a $5,000 deductible IRA contribution for 2009 ($6,000 each if both are age 50 or older).

Impact of filing status on contributions

Filing status also affects the amount of the IRA contribution deduction. If either spouse is covered by a retirement plan through his or her employer, the deduction may be reduced or eliminated depending upon the couple's filing status. For example, if separate returns are filed, the lower compensated spouse may only be able to contribute up to the amount he or she earned in taxable compensation that year.

Example

Wendy, who is 45 years of age, is not employed, but her husband Harold participates in a 401(k) plan sponsored by his employer. The couple files a joint income tax return and reports an AGI of $105,000. Wendy can make a deductible contribution to a traditional IRA up to the full $5,000 because she is not an active participant in an employer-sponsored retirement plan and their combined AGI is below $166,000.

Wendy's contribution to an IRA can be as much as $5,000 in 2009, since she's less than 50 years old, a nonworking spouse, and her husband is a qualified plan participant. However, Harold cannot make a deductible IRA contribution because their combined AGI is above the 2009 phase-out range for plan participants who are married and filing jointly ($166,000 to $176,000 in 2009).

If Wendy and Harold filed separate returns, however, the amount that Wendy could contribute to her IRA, and still be able get a deduction, could be less than $5,000 if her taxable income for 2009 is less than $5,000. That is, her deductible contribution amount would be limited to the amount of her gross income this year.

Many tax issues arise when an employee leaves, or is terminated, from employment. How they are handled can make the difference between having an employee leave feeling more in control of the situation and one who may perceive the need for a better severance package. Here are some considerations that should not be ignored.

Many tax issues arise when an employee leaves, or is terminated, from employment. How they are handled can make the difference between having an employee leave feeling more in control of the situation and one who may perceive the need for a better severance package. Here are some considerations that should not be ignored.

Unemployment compensation: Unemployment insurance payments are taxable as income. Payments to laid-off employees from company-financed supplemental unemployment benefit plans (referred to as "guaranteed annual wage" plans) also constitute taxable income to the employees in the year received.

Severance payments: In some circumstances, terminated employees may receive a severance package. Severance pay is taxable and must be reported along with other employee salary or wages.

Golden parachutes: Highly compensated employees or independent contractors may have "golden parachute" clauses in their contracts specifying that they will receive certain benefits, beyond their usual compensation, in the event the ownership or control of the corporation changes. Golden parachute benefits can include a bonus, severance package, stock options or a combination. If the employee receives an "excess parachute payment," a complex calculation under the tax code, the employee may be subject to an excise tax of 20 percent plus the income tax due.

Incentive stock options: Incentive stock options (ISOs) are not taxed as income at the time the stock option is granted to an employee, nor are they taxed as regular income at the time the employee exercises the option and buys the stock. Instead, tax is generally deferred until the employee sells the stock, at which time the lower capital gains tax rates apply, so long as the stock is held for at least two years after the options were granted and at least one year after they were exercised. If the holding period test is not met, the stock may be treated as compensation, which will result in tax being paid at regular income tax rates, rather than at capital gains rates, when the stock is sold.

Although no income tax is generally due when the stock option is exercised, the alternative minimum tax (AMT) can be triggered. Depending on your overall tax situation, you may have to pay AMT in the year you exercise your stock options.

IRA rollovers: In many situations, a distribution from a qualified plan may be rolled over to a traditional IRA or to another qualified plan, tax-free. Generally, the transfer must be accomplished within 60 days of the distribution or withdrawal. However, any portion of the withdrawal that is not rolled over within the 60-day period will be taxed as ordinary income and may be subject to a 10 percent penalty on premature distributions if the distributee is less than 59 ½ years old.

Job hunting expenses: Individuals may deduct all expenses incurred in seeking employment in the same trade or business regardless of whether or not the search is successful. Such expenses include the preparation and mailing of resumes, as well as travel expenses. Job-hunting expenses are not deductible, however, if an individual is seeking employment in a new trade or business. If an employee receives a severance package that includes assistance from a job placement or resume writing service, it can usually be arranged to come under the "tax-free fringe benefit" category while preserving a full deduction for the employer.

Health care issues: An itemized deduction is allowed for medical expenses that exceed 7.5% of adjusted gross income. The deduction can be taken for the taxpayer and his or her spouse and dependents. Also, the employee, spouse and dependents may be eligible for continued health care coverage through the former employer's group plan, for a limited period of time, under the Consolidated Omnibus Budget Reconciliation Act (COBRA) rules.

Just because you're married doesn't mean you have to file a joint return. This is a common misconception along with thinking that "married filing separately" applies to couples who are separated or seeking a divorce. As a married couple, you have two choices: file a joint return or file separate returns. Naturally, there are benefits and detriments to each and your tax advisor can chart the best course of action for you.

Traditional treatment

Historically, the tax laws reward marriage. Married couples are eligible for many incentives. For example, they can make tax-free gifts of up to $26,000 (for 2009) to the same individual ($13,000 from each spouse). Single taxpayers can only make tax-free gifts up to $13,000 to the same person. Married couples also have a larger home sale exclusion: they can exclude up to $500,000 in gain from the sale of their home. Single taxpayers are limited to an exclusion of up to $250,000.

Moreover, single individuals no longer have a leg-up when it comes to the standard deduction because of the "marriage penalty." The standard deduction for married couples is now twice the deduction for single taxpayers. For 2009, the standard deduction for married taxpayers filing jointly is $11,400 (for single taxpayers, the standard deduction for 2009 is $5,700). Married taxpayers filing separately also individually take a standard deduction of $5,700 for 2009.

Important credits and deductions

Credits and deductions significantly lower your tax bill. Unfortunately, some credits and deductions are lost unless you file a joint return. These include:

-- HOPE Scholarship credit (temporarily renamed the American Opportunity Education credit for 2009 and 2010);

-- Lifetime Learning credit;

-- Dependent care credit;

-- Earned Income Tax Credit;

-- Adoption credit; and the

-- Deduction for student loan interest.

If these credits and deductions are valuable to you, and you are married, you'll have to file a joint return.

When to file separately

Two events may make you decide to file a separate return:

--Your personal itemized deductions are very high; or

--You do not want to be legally responsible for your spouse's tax liability.

Let's look at the second one first. When a married couple files a joint return they are both legally liable for any tax owed to the government. This is a hard and fast rule. The moment you sign your name to your joint return, you are just as liable for the tax as your spouse. The IRS can come after both of you or just one for the full amount of the tax liability.

Getting out of joint liability is not easy. If you did not know about errors or false statements on your return, you can petition for relief under the innocent spouse rules. The IRS may excuse you from joint liability but the process takes a long time. If you do not want to be liable for your spouse's taxes, don't sign a joint return.

Sometimes one spouse has a large amount of itemized deductions. This often occurs because of illness. Medical expenses are deductible only to the extent that they exceed 7.5 percent of adjusted gross income. If only one spouse had the majority of the couple's medical expenses, it may be easier to overcome the 7.5 percent threshold when only one spouse's income is reported on the return.

Employee business expenses and casualty losses, such as damage from a natural disaster to property owned by one spouse, also are common triggers for filing separately. If these expenses are high, they may reduce your tax bill if reported on a separate return.

Itemizing

If you decide to file separate returns, you and your spouse must itemize deductions or take the standard deduction. You cannot itemize deductions on your return and your spouse take the standard deduction on his return.

Weighing the pros and cons of filing separately is complex and unique to each couple. Lots of other factors, such as children, Social Security and pension benefits, and residency, can make a difference. Contact this office for help in deciding which filing status will maximize your tax breaks and minimize your tax bill.