With the filing season well underway, the IRS is estimating that more than 144 million individual tax returns will be filed this year - some 4 million more than last year - and it expects to receive most of them by the April 17 deadline.
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Of last year's tax returns, nearly 80 percent were electronically filed, and that rate is projected to increase substantially as more preparers (all those who file 11 or more individual returns) are required to file electronically.
"W-2s were out a little earlier than in prior years, and last year we couldn't file Schedule A until mid-February," said John Hewitt, president of Liberty Tax Service. "So our volume is a little higher than last year at the same point in the filing season."
Although the number of banks offering refund anticipation loans has declined, Liberty currently offers them in 44 states. "We offer state-sanctioned consumer loan products in the other six states," Hewitt explained.
Some corporate forms were released a bit late, pointed out Mark Luscombe, principal analyst at CCH, a Wolters Kluwer business. "There was some concern that it was causing some problems with some filers."
There are a number of changes for the 2012 filing season that impact conversations between taxpayers and their preparers, Luscombe explained. "Those who did Roth conversions in 2010 had the option to spread the tax between 2011 and 2012," he said. "This is the first year to pick up taxes on the conversions, and some people won't necessarily remember that something they did in 2010 will affect the returns they file in 2012."
For 2010 conversions, only half of the resulting income must be included in income in tax year 2011, and the other half is reported in 2012 (on 2013 returns), unless the taxpayer elected to include all of it in income for 2010. For conversions made in 2011, all of the income resulting from the conversion must be reported on the 2011 return.
"There were a couple of changes to basis reporting that will impact returns," Luscombe said. "Form 1099-B has been revised to show the broker reporting of basis, so taxpayers have to make sure that what they report on Schedule D and on Form 8949 conforms with what's being reported to the IRS on Form 1099-B."
Form 8949, a new form, is used to report capital gain and loss transactions. Schedule D, the form traditionally used to show these individual transactions, is now used as a summary sheet, reporting amounts for total sales price, basis and other adjustments. For securities both bought and sold in 2011, Form 1099-B will show the basis, according to the IRS.
Another new form, Form 8938, is for reporting foreign financial assets, Luscombe said. "This is the first year that this reporting has been required," he noted. FBAR -Form TD F 90-22.1, which has been around for several decades - is a separate filing requirement. Unlike the FBAR form, Form 8938 is attached to a taxpayer's income tax return, and individuals who do not have an income tax return filing requirement do not have to file it.
Although the employee retention credit was a 2010 hiring issue, the newly hired employees had to be retained for 50 weeks, Luscombe noted. "Therefore it's in 2011 that people would claim the credit," he said.
"Although the exam that preparers have to take to become registered tax return preparers is available now, preparers have until Dec. 31, 2013, to pass, so as long as preparers have renewed their PTIN they can prepare taxes this year," he said.
As far as a number of tax provisions that expired at the end of 2011, Luscombe predicted that they wouldn't be extended until the end of 2012.
A result of the failure of Congress to pass any extenders legislation was that there were no eleventh-hour surprises at the start of this year's filing season, said Bob Scharin, senior tax analyst at the Tax & Accounting business of Thomson Reuters.
"The two-month extension of the payroll tax cut does raise some filing questions in terms of payroll tax returns of employers when filing the first quarter," he said. "In terms of income tax, it raises the question of what to advise clients who pay estimated taxes for 2012, because certain expiring tax provisions were not extended. Chief among them was the Alternative Minimum Tax patch. And when you're completing someone's 2011 return, you need to tell the client what amount of estimated tax to pay for 2012. The problem is that Congress has not taken up extenders legislation, so we don't know what the AMT exemption will be, as well as some other tax breaks."
"The practitioner has the problem of not knowing what the AMT exemption is for 2012," he continued, "so it makes it hard to know what the taxpayer will owe for 2012 and what the estimated tax payment should be."
Scharin noted that numbers from past returns would play a greater role on 2011 returns. In addition to 2010 Roth conversions, energy credits need to be scrutinized, he said. "The maximum amount of the credit for 2011 is $500, but that has to be reduced by any non-business-entity credit claimed since 2006, so return preparers need to look at past returns to determine how much of a credit, if any, the client is eligible for this year."
The credit generally equals 10 percent (down from 30 percent the past two years) of what a homeowner spends on eligible energy-saving improvements, up to the $500 maximum (down from the $1,500 combined limit that applied for 2009 and 2010). In addition, the energy standards are increased for most property - windows, exterior doors and skylights, for example, must meet Energy Star Program requirements.
Those who claimed the First-Time Homebuyer Credit in 2008 got an interest-free loan that needs to be repaid in 15 installments beginning with their 2010 return, said Scharin. "So now, they need to look back and see how much the credit needs to be recaptured or repaid on their 2011 returns."
Then there's the question of the taxability of a state income tax refund, Scharin noted. "The answer depends on whether the client received a tax benefit when the refunded amount was originally paid," he said. "If they got a refund of a 2010 state overpayment and itemized deductions in 2010, then part or all of the refund would be taxable, but if they claimed the standard deduction in 2010, then the refund would not be taxable. The computation is more complex for those who paid AMT in 2010. The bottom line is they need to look at their 2010 return in order to determine the taxability of the refund."
Many of the early filers this tax season are parents who need the information from the return to apply for scholarships, student loans, and various education tax benefits, said Larry Novick, a Holliston, Mass.-based preparer. "My big push will come in the middle of February when the Form 1099s come out. My clients who owe the government won't come in until the end of March or in October."
Taxpayers are more fiscally conscious as a result of the economic downturn, according to Sandra Robb, a Kent, Wash.-based preparer. "Most of them are planning ahead, and calling to get a list of what documents they need to bring," she said. "When they're here, they want to discuss the latest tax law changes to make sure they've maximized their deductions. This has not been the case in previous years. In a way, it makes the job more fun, because we get to strategize with them to get to the lowest dollar amount they owe in tax."
Robb is using a Western Union debit card to replace the RALs she formerly offered clients. "For those without a checking account, it allows their refund to be deposited directly to the debit card, with no extra fees," she said.
"Because of the later deadline for Form 1099s, April 17 will come a lot more quickly," said Linda de Marlor, president of Rockville, Md.-based Tax-Masters Inc. "And we'll probably do more extensions," she added.
"A lot of our clients are foreign, so we're paying special attention to the reporting requirements if they own anything outside of the country," she said. "In many cases, their parents put their name on the account and they're not aware of the responsibility to report it, or the penalty if they don't report it. I ask them if they could walk into the bank today and take money out of the account, even if mommy and daddy are still alive. If they say, 'Yes,' it has to be reported."