2012 Tax Changes, Part II

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Here are a couple more changes following up to yesterday’s blog entry:

Earned Income Tax Credit

Changes to the Earned Income Tax Credit (EITC) make the credit more available, and valuable in tax year 2012 than it was in tax year 2011. Credit eligibility is based on income and household size. Households with three or more qualifying children will receive a 2012 tax credit of $5,891 if their Adjusted Gross Income (AGI) is less than $45,060 when filing individually or $50,270 when married filing jointly. The equivalent tax relief in 2011 was $5,751 for individuals with an annual AGI less than $43,998 or $49,078 when married filing jointly.

On the other end of the EITC spectrum, for tax year 2012, households with no qualifying children will receive a $475 tax credit if their AGI is less than $13,980 when filing individually or $19,190 when filing married filing jointly. Similar middle tier credit adjustments are available for taxpayers claiming one or two qualifying children.

Retirement Contributions

For tax year 2012, the ceiling on elective deferrals without the need to pay upfront taxes for 401(k), 403(b), certain 457 accounts, and thrift savings plans increased $500 from $16,500 to $17,000 for tax year 2012. Additionally, the limit on annual additions to contribution plans increased for tax year 2012 from $49,000 to $50,000.

These are just the highlights of some of the changes that you’ll find when working on your tax returns come April. If some of these changes caught you off guard, learn your lesson and prepare a plan now for tax year 2013… due April 2014.

2012 Tax Changes

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I was recently asked what changes are looming for this year’s taxes. Seems like a simple enough question, right?  But the question wasn’t about 2013; they were asking me about tax year 2012 and any changes they should be aware of compared to tax year 2011. Technically, they were asking about last year’s changes that are now a concern given the looming tax day, April 15, 2013.  Here are just a couple:

Personal Exemptions

For tax year 2012, your line 42 exemption (if you file a Form 1040) has increased since tax year 2011. Most taxpayers will receive a $100.00 increase from $3,700 in tax year 2011 to 3,800 in tax year 2012 for their personal exemption amount for each qualifying person.

Standard Deductions

Taxpayers who take the standard deduction, instead of itemizing their deductions, will benefit from tax year 2012 increases from the 2011 standard deduction amounts. The 2012 standard deduction amount is $11,900 for married couples filing a joint return, up $300 from the standard deduction allowed in tax year 2011. The standard deduction for taxpayers filing single or married filing separately is $5,950, up $150 from tax year 2011. The standard deduction for taxpayers filing as head of household for tax year 2012 is $8,700, up $200 from tax year 2011.

Extension for Farmers & Fishermen

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This year the IRS was not ready to begin receiving and processing 2012 tax returns when they normally do so.  In fact, they’re still not ready.  The IRS has been making last minute changes stemming from the American Taxpayer Relief Act which, by the way, has such a nifty name.  Where exactly is the tax relief in this legislation?

The IRS doesn’t appear to be ready for forms commonly filed by fishermen and farmers either.  Form 4562 and the processing systems involved need “extensive programming and testing” according to the IRS.  Another unintended consequence of the American Taxpayer Relief Act.

And the estimated tax normally required by March 1st can be paid up until April 15th without incurring a penalty this year.  It does not look like merit-based penalty relief; all you have to do is “ask.”  However, it is important for farmers and fishermen to know that this penalty relief does not come automatically.  They will need to submit a penalty waiver (Form 2210-F) with their tax return.

TIGTA Reports on Refund Fraud by Prisoners

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One of the chronic problems at the IRS is they keep issuing refunds to criminals.  Refund fraud (a criminal form of tax relief) is a widespread issue reaching all the way into our country’s prisons.  Most people would probably be shocked to know how common refund fraud is in prison.

The Treasury Inspector General for Tax Administration (TIGTA) has carefully studied this problem over the past seven years and the data shows things are not getting better.

In calendar year 2004, there were 18,103 fraudulent tax returns filed by prisoners and the IRS handed out $13.4 million in refunds to them.  In 2007, there were 37,447 fraudulent tax returns filed by prisoners and the IRS paid out $29.2 million.  The most recent data is from 2010 and it shows that there were a staggering 91,434 fraudulent tax returns filed from prison.  The IRS paid $35.2 million that year.  But to be fair, they also prevented $757.6 million worth of refunds (identifying them as fraudulent before the damage was done).

In a new study, TIGTA explains how the “Prisoner File” which the IRS relies on to help them vet out bad refund claims is often innacurate and incomplete.  Furthermore, the rules allowing certain communications between the Treasury and the Federal Bureau of Prisons have expired.  Given the statistical trend of this tax problem, it obviously should be an area of focus for our government in coming years.

Business Use of the Home: New Option for 2013

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photo via mybadpad.com

Many self-employed taxpayers work from home.  But not all of them can deduct expenses for the “business use of their home.”  The tax worksheet (Form 8829) may be only one page long, but it’s 43 lines of mind-numbing detail (at least for one more year) that you are better off skipping if you see that you don’t meet the threshhold requirements.

In order to qualify for the “business use of the home” deduction, there must be a section (or sections) of your home which you use exclusively and regularly as your principle place of business.  The deduction amount is based on square footage dedicated to this purpose. Therefore, no matter how often you find yourself on your laptop in that 3′ x 3′ area of your mancave occupied by the Lazyboy, if you ocassionally flip on the TV from that same spot, or host superbowl parties or such, you cannot satisfy the “exclusivity” prong of the test.

The good news is the IRS recently announced a new simplified option for “business use of the home” that will apply to 2013 taxes (during the 2014 filing season).  Taxpayers will be able to opt for a straight $5.00 per square food deduction (capped at $1,500 per year) instead of stressing over dreaded Form 8829.  It is believed that more taxapayers will take advantage of the tax relief afforded by this deduction and will save taxpayers something like 1.6 million hours of work and recordkeeping annually.  However, the basic exclusivity requirments explained above will remain in place.

Tax Protestors: Keep your Distance

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Tax protestors typically turn to a handful of “canned” arguments regarding the government’s lack of authority to levee taxes.  These arguments are typically not very successful.  When tax protestors refuse to pay taxes based on these flawed legal positions, they are typically hit with a barrage of penalties and interest on top of their tax debt, and some even do prison time.  But tax protestors who are also former IRS agents? — not very typical.

That’s what makes the story of Sherry Peel Jackson so interesting.  She worked for seven years as an IRS revenue agent, then she went into private practice as a CPA, then she spent four years in prison for failure to file tax returns, and now she tours around promoting the books she wrote in prison about the illegalities of income taxes.

Don’t believe anyone who tells you that taxes are illegal.  You will want to avoid these people like the plague.  The tax protestor groups are a sham and can cause you some serious tax problems.

IRS Inflation Adjustments

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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

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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

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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

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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.