IRS Inflation Adjustments

This blog post lists some of the Annual Inflation Adjustments published by the IRS today that are interesting not only  to CPAs and tax attorneys. It may be helpful to understand that the 2012 “tax year” was last year (for taxes filed in 2013). But the 2012 tax season is right now (well, actually between January 30th and April 15th 2013). So, we will not be required to file for tax year 2013 until the 2014 tax season. The terminology gets a little confusing.

Adjustments for Tax Year 2012:

  • standard deduction increased to $6,100 (was $5,950)
  • personal exemption increased to $3,900 (was $3,800)
  • maximum Earned Income Credit amount increased to $6,044 (was $5,891)

Adjustments for Tax Year 2013:

  • new tax rate of 39.6 percent added for individuals whose income exceeds $400,000
  • personal exemption subject to a phase-out that begins with adjusted gross incomes of $150,000
  • the Alternative Minimum Tax exemption amount for tax year 2013 is $51,900 (was $50,600)

Make note of these changes because lawmakers may one day be purging the tax code of all deductions, exemptions, credits, and anything else that resembles tax relief.

The TAS Approach to Tax Reform

image via realage.com

If you recently read (or re-read) the unabridged English version of Les Misérables in anticipation of the movie that came out on Christmas day, your eyes consumed approximately 531,000 words.  This is slightly less than the word count in the Bible, which is somewhere between 800,000 – 900,000 depending on who you ask.  And if you can even imagine it, the US Tax Code contains about 4 million words!  That is almost 4 times the length of the entire Harry Potter series!

Practically everyone agrees that our tax code is too complicated, too detailed, and too long.  Tax reform and simplification was the top concern expressed by Nina Olson, National Taxpayer Advocate, in her annual report to Congress.  The complexity of the tax code breeds a number of negative consequences, including uncertainty for those with tax questions and unfair results for those seeking tax relief.

The strategy that the Taxpayer Advocate Service (TAS) recommends is to start with a clean slate by wiping out all “tax expenditures” such as exclusions, exemptions, deductions, and credits.  Then lawmakers would need to methodically decide what is absolutely necessary before bringing it back.  TAS calls this a “zero-based budgeting” approach.

I would call this the “messy closet” approach, and I like it.  Sometimes a closet gets to the point where the only way you can regain order is by taking everything out and starting over.

IRS Hopes to Answer 63% of Calls in 2013

image via thewashingtonnote.com

The Taxpayer Advocate Service (TAS) released its annual report to Congress today which focuses on a few main themes: tax code simplification/reform, increased funding for the IRS, greater safeguards against identity theft, and improved taxpayer service.

For anyone working in the field of tax relief, and for taxpayers who contact the IRS seeking to address their back tax debt, some of the most interesting statistics are related to taxpayer service.  The IRS has a notoriously poor customer service record, especially with regard to the phones:

  • IRS received over 100 million calls in fiscal year 2012 and 30% went unanswered
  • Average wait time was almost 17 minutes in FY 2012
  • IRS goal is to answer 63% of incoming calls in FY 2013, down seven percent from 2012

And these numbers tend to get worse year after year.  Obviously the decline in customer service is closely related to the reduction in funding to the IRS.  However, I don’t know how they can seriously set a goal of answering only 63% of calls.  What an embarassment!

IRS Delays Start of 2013 Tax Season

The IRS has delayed the official start of tax season by a whole 8 days this year, announcing today that they will begin accepting tax returns on January 30th.  The delay is a result of the fiscal cliff legislation and the necessary tweaking, updating, and testing of IRS processing systems.  No change to the filing deadline as of yet…

Eight days doesn’t seem like a lot, but when you consider the millions of early filers that normally file during those first eight days, we can expect a pretty big bottleneck this year.  If you do expect a tax refund, don’t be surprised if it takes the IRS a little longer than normal to send you the check or wire you the money.  You can speed up the process if you file electronically and opt for direct deposit, but you’ll still need to be extra patient this year.

Meanwhile here at the California Franchise Tax Board, state tax season begins TODAY.

Truncated Tax ID Numbers

image via ssa.gov

Many people wait with some anxiety for their income tax refund check around this time of year.  If you get a big refund then you, in essence, have given the government an interest free loan all year.  Still, many taxpayers overpay throughout the year because they have grown accustomed to receiving a refund check, which they see as a form of tax relief.

So what if that check never came?  It happens sometimes, and all too often it is the result of identity theft.  The IRS has taken numerous steps to prevent identity theft, but it still pays out billions of dollars in erroneous refunds.  One of the newest proposals in the fight against identity theft is the Truncated Taxpayer Identification Number, or TTIN.

The TTIN is basically the last four digits of a Social Security Number (SSN) and looks something like this: xxx-xx-4777 or this ***-**-4777.  The IRS has issued proposed regulations that would allow certain information return filers to use a TTIN instead of a SSN on their tax documents.  The IRS has run a successful TTIN pilot program in the past and it is believed that this will help curb identity theft.  Even if the regulations are approved, a full 9-digit SSN will still be required for 1040 income tax returns.  The proposed regulation has to do with information returns such as forms 1099, 1098, and 5498.

Fiscal Cliff Highlights

Payroll taxes increased for wage earners

There’s no tax relief for anybody in the fiscal cliff tax deal. For wage earners, your Social Security (FICA) tax withholdings will be deducted at 6.2 percent for the first $113,700 of earnings. This is a 2 percent increase from the 4.2 percent deduction that has been the withholding rate for the past two years. Unlike some of the other changes that won’t be felt until the 2013 tax season, this change will have an immediate impact on your next paycheck.

Income taxes increased only for the wealthy

Income tax rates will remain the same for individuals with annual income of less than $400,000, or $450,000 for those filing married joint returns. The income tax rate for those wealthy taxpayers will increase from 35 percent to 39.6 percent.

Investment taxes increased only for the wealthy

Capital gains and dividend tax rates will remain the same for those individuals earning less than $400,000, or $450,000 for married joint filers. The capital gains and dividend tax rates for the wealthy will increase from 15 percent to 20 percent.

Income tax deductions and exemptions limited for the wealthy

Individuals with annual income of at least $250,000, and those married filing jointly earning at least $300,000, will be limited on the personal exemptions and itemized deductions they can claim. Taxpayers with incomes above $422,500 will not qualify for a personal exemption. This is a throw-back to the limits on deductions and credits for the wealthy that were in force prior to the Bush era tax cuts, and that were eliminated in 2010.

Important tax credits extended

Tax credits created by American Recovery and Reinvestment Act of 2009 are extended for five years. These include the Earned Income Tax Credit, Child Tax Credit, and the American Opportunity Tax Credit.

Debt Forgiveness Extended

Homeowners that weren’t able to complete their debt negotiations or procedures before December 31, 2012, were granted a reprieve. Forgiven mortgage debt will continue to not be treated as taxable income for an additional year.

The National Debt Ceiling: The "Other Cliff"

By now you probably know that the dreaded fiscal cliff has been averted, at least for a month or two.

The term fiscal cliff refers to the potential for a deeper recession that would have been triggered by the terms of the Budget Control Act of 2011 which was scheduled to go into effect on January 1, 2013. It was thought that if the Bush-era tax cuts were allowed to expire, thereby raising taxes for virtually everybody, at the same time that mandatory governmental spending cuts were scheduled to be implemented, there would be a devastating impact on the U.S. economy such that the economy would be in a free-fall … over the cliff.

The government narrowly avoided the fiscal cliff by passing the American Taxpayer Relief Act in these first days of 2013. The compromise that was reached focused primarily on tax relief and not spending cuts. The main impact will be on those taxpayers who are considered wealthy. However, if you were paying attention during the presidential campaigns, you will notice that the income threshold for those who are considered “wealthy” increased significantly from the time of campaigning to the thresholds established through this deal.

The next political hurdles are the negotiations on the spending cuts and the debt ceiling. Very simply, the debt ceiling is the maximum amount that the federal government can borrow at any given time and in-turn, pay its obligations that have already been incurred. If a compromise cannot be reached, the economy may go off the fiscal cliff despite the recent deal. Congress has about two months before it must raise the debt ceiling or risk causing the government to default on its bills and financial obligations. If a deal is not made, a federal government shutdown is possible. This may include suspension of the payment of federal benefits and payroll, in addition to the shutdown of government departments such as the Internal Revenue Service, during the height of tax season… of course.

IRS to Announce Official Start Date of Tax Season

image via imisioluwa.blogspot.com

So, what is the official start date of the 2013 tax filing season? In other words, what is the first day that the IRS will begin accepting 2012 tax returns? This is still an open question.

Without congressional action, the IRS had said that they would not be able to accept a majority of tax returns until March. But Congress has acted and now it is just up to the IRS to make a decision about the “start date.” Once the IRS has finished reviewing the new legislation, they will announce the official start date of the 2013 tax season. The IRS will also have information about paycheck withholding based on the new tax rates.

Until then, there are typically plenty of things to do in preparation for filing your tax return, especially for the self employed. Now is the time to organize your records and identify a qualified tax preparer. If you anticipate tax problems this year — if you are going to owe the IRS more than you can pay — then it will also behoove you to identify an experienced tax attorney who can represent your interests before the IRS.

A New Year Resolution

photo via fitdeck.com

Here we are again at the dawn of another tax season.  It will begin gradually with the early filers accumulating their income documents in January in hopes of filing and obtaining a refund check sometime during the first half of February.  It will end in a flurry with millions of tax return procrastinators who will file just minutes before midnight on April 15th.

Those who wait are typically those who know they are going to owe.  And some inevitably wait too long.  Once April 15th passes, the rationale is “what’s another day?” — and many taxpayers find themselves letting months slip by and they just never get around to filing.  Of course, this rationale is faulty because penalties and interest accumulate with each passing day, so each day really does matter.

Some have let multiple tax seasons pass them by, and the more delinquencies that pile up, the more difficult it becomes to get back on track with the IRS.  But there is a way back, even if you have no way of paying your full tax debt.  There is a way to get back in the good graces of the government and move on with your life.  Resolve to clean things up this year.  Contact Montgomery & Wetenkamp, tax relief attorneys, for a free consultation.  Call (800) 454-7043.