Top 10 Issues for This Tax Filing Season
This season has more than its share of headaches for practitioners.
If there were not a constant stream of new issues, there would probably be a lot fewer taxpayers using paid preparers than there are now. The 2010 tax year is likely to be one of the more challenging in recent memory, and there are several reasons why. Accounting Today columnists George G. Jones and Mark A. Luscombe of CCH describe the top 10 new issues confronting tax preparers this filing season on the following slides.
Tax provisions that expired at the end of 2009 were renewed only in December of last year. The list includes such major provisions as tax rates, the alternative minimum tax, the estate tax, the state sales tax deduction, the above-the-line deduction for tuition and fees, the exclusion for qualified charitable IRA distributions, the research and development credit, and 15-year amortization of leasehold improvements. The IRS was unable to process many forms, including Schedule A for itemized deductions, until Feb. 14, as a result of the last-minute legislation.
Although many of the provisions of the Patient Protection and Affordable Care Act have delayed effective dates into future years, a number of provisions are effective for 2010. These include the new small-employer health insurance credit, providing a credit of up to 35 percent of employer health insurance premiums for employers with less than 25 full-time employee equivalents and average wages of not greater than $50,000. Nondiscrimination rules for simple cafeteria plans are also waived for employers averaging less than 100 employees and making certain minimum contributions. Other provisions effective for 2010 include an exclusion for employer-provided medical benefits for children under age 27, an increased adoption credit that has been made refundable, and codification of the economic substance doctrine.
The Small Business Jobs Act of 2010 expanded the Code Section 179 expense limits for 2010 to $500,000 and the asset eligibility limit to $2 million. It also extended the qualifying property (up to a $250,000 limit) to include leasehold improvement, restaurant, and retail improvement property that had qualified for 15-year amortization. The business start-up expense deduction was doubled to $10,000 for 2010, and, also for 2010 only, health insurance costs are deductible in determining self-employment income as well as taxable income. Bonus depreciation was also extended through 2010 at a 50 percent rate through Sept. 8, 2010 and at 100 percent for the remainder of 2010 and all of 2011. Rollovers were permitted within 401(k), 403(b) and 457 plans to Roth accounts within those plans.
Taxpayers claiming the homebuyer credit for 2010 will require additional documentation to support the credit, including a copy of the contract and the Department of Housing and Urban Development closing or equivalent statement. This documentation will require paper, rather than electronic, filing. Qualified taxpayers are required to have final sales contracts executed before May 1, 2010, and to have closed prior to October 1, 2010. Also, for those taxpayers that claimed the homebuyer credit in 2008, 2010 starts the repayment obligation of the credit that applies to those taxpayers.
Tax return preparers signing 2010 returns are required to obtain a new preparer tax identification number. The system for obtaining PTINs has not been working well for all preparers, and the IRS continues to tweak the system to try to resolve problems. Many tax return preparers have been able to retain their prior numbers. Related competency testing and continuing education requirements for unenrolled preparers have been postponed for at least a year. It remains to be seen what impact these changes will have on the universe of people offering tax preparation services.
Many taxpayers have been eligible to do Roth conversions for the first time in 2010 with the elimination of the income restrictions. The default election is for taxpayers to spread the tax on the conversion over 2011 and 2012, but tax preparers will want to review with their clients the wisdom of potentially paying the tax with the 2010 return if their tax rate brackets might be higher in 2011 and 2012. In any event, once conversion income is reported on the taxpayers 2010 return, the decision not to defer the income to 2011 and 2012 is final and cannot be reversed.
The phase-out of personal exemptions and itemized deductions for higher-income taxpayers, after gradually being phased down over the last decade, is finally gone for 2010. Like many of the other tax breaks from the 2001 Tax Act, however, the phase-out was scheduled to return in 2011 unless Congress extended those tax breaks, which it ultimately did for another two years.
With 2010 having survived as at least one year without an estate tax, tax return preparers will have to gear up to handle carryover basis issues for heirs who inherited property in 2010. For 2010 estates that opt not to be subject to the temporary estate tax regime applicable to 2011 and 2012, the first $1.3 million in assets of the estate escape carryover basis, in addition to another $3 million in assets inherited by the surviving spouse. The IRS is working on a form for executors to determine which inherited assets are subject to and which escape carryover basis. Heirs selling those inherited assets subject to carryover basis in 2010 or later years will have to determine that carryover basis in order to calculate the gain on the sale.