The Affordable Care Act continues to be on the minds of return preparers as they ready themselves for another filing season.
"The biggest thing is the change in the law resulting in additional tax that everyone will owe," said Alan Straus, a New York-based CPA and attorney. "Clients will find themselves having to write sizeable checks that they weren't expecting. I've been sending explanations of the two new taxes [on investment income and on earned income], but it doesn't sink in until you actually have to write a check."
"Another problem for preparers is to be up to speed in understanding the new laws," he said. "I've been testing my software and there are errors in it. For example, it is still picking up the taxes from a Roth IRA conversion in 2010." In 2010, the IRS offered a two-year spread to pay taxes on a Roth conversion, with half the tax due in 2011 and half in 2012.
"Some preparers using it won't understand that there are errors, and I'm concerned that it will take time to get the kinks out of the system," Straus said. "Preparers should tread carefully to be certain they understand the intricacies of new laws, and be sure their software is up to snuff."
Another concern is whether and when certain of the extenders will be retroactively reinstated, he indicated.
Some of the extenders are significant, according to Edward Karl, vice president for taxation at the American Institute of CPAs. "For businesses, these include increased expensing under Section 179, where the limit is dropping from $500,000 to $25,000, the 50 percent bonus depreciation, the Work Opportunity Tax Credit, and the credit for research and development expenses," he said.
Roger Harris, president of Padgett Business Services, agreed: "In the past, the Alternative Minimum Tax was always the motivating factor for legislators to move on the extenders, because no one wanted to be saddled with obstructing the solution. But now that the AMT fix is permanent, the other extenders don't carry the same weight of motivating Congress to do anything."
"Also," he noted, "this is the first year where the Affordable Care Act is front and center during filing season. The ACA will bring a lot of new challenges."
"There are new taxes in the act, and a lot of us are unsure as to what guidance or help our clients will expect in terms of their individual situation," he said. "There will be questions for us from both individual and business taxpayers as to what they should do, and can they be penalized."
HELD UP AT THE STARTING LINE
For Chuck McCabe, president of Peoples Income Tax and The Income Tax School, the late start to filing season is a concern. "It presents challenges for a lot of tax preparation businesses, because of cash flow and staffing," he said. "Preparers are in such a highly seasonal business. They're looking forward to getting revenue in January to pay their off-season expenses. Since it may take two weeks for a refund to be direct deposited and the preparer fee gets transmitted to the preparer, they may not get revenue until mid-February. Meanwhile they have to pay their employees, as well as rent, utilities and other expenses, so it's important for them to decide how to bridge that gap. They may want to reduce staffing until the first day of e-filing, and consider having the first pay period a three-week pay period."
A number of banks are offering assistance in this, according to Cathy Mueller, director of operations at Peoples Income Tax. "They provide 50 percent of your tax preparation fees on acknowledged returns with a refund transfer at the beginning of filing season, then when IRS funding begins, they withhold 50 percent to pay back the balance," she said.
Mueller recommends that preparers staff their offices prior to the beginning of e-filing so taxpayers can come in and leave their information. "Otherwise, they will go to the big chains that are open. It's the same set of issues as last year -- you can prepare the return, you just can't send it."
Mueller also recommends giving clients an incentive to come in early. "You might offer a discount if they come in prior to e-filing," she said.
'GOING UP BIG TIME'
Miguel Farra, partner-in-charge of the Tax Department at Top 100 Firm Morrison, Brown, Argiz & Farra LLC, also noted the tax increases ushered in for 2013. Above certain brackets, taxes have gone up in a number of areas, he observed. "The maximum tax rate is now 39.6 percent, up from 35 percent," he said. "Capital gains and dividends have increased from 15 percent to 20 percent, and there's the 3.8 percent Medicare tax on net investment income. Also, there is a 0.9 percent hospital insurance tax that applies to unearned income of high-income individuals. A lot of people will be subject to tax increases," he said.
Moreover, Farra noted, "There are hidden taxes in the form of the reinstatement of Pease and PEP - the limitation on itemized deductions and the personal exemption phaseout. The bonus 50 percent depreciation has expired, and the Section 179 deduction decreases from $500,000 to $25,000."
The end result? "Taxes are going up big time," he said. "Preparers should check to see if a taxpayer qualifies for installment sale treatment, because if they elect to report all in the year of sale they will have greater adjusted gross income, whereas if they can spread it out, they can lessen the effect of the 3.8 percent Medicare tax. A small businessman can make a pension contribution into a SEP IRA, which could bring him below the threshold of the 3.8 percent Medicare tax."
The 3.8 percent Medicare tax also concerns Mike Campbell, partner-in-charge of Top 100 Firm BDO's Private Client Services Group. "Any time there's a new tax and new forms to fill out, we get concerned," he said. "Until you see it in practice, you worry about your tax software doing it properly. It will impact all of our clients, so the concern is that it gets calculated correctly and that the IRS form is functional enough to capture all of the implications of the tax for our clients, and also easy enough to fill out so it doesn't add an inordinate amount of prep time."
"The good news about taxes is that they are in the news, and our clients definitely know about the increases," he said. "We spend a lot of time preparing our clients and since we work with them on a quarterly basis, they pretty much know what's coming down the pike."
"We're looking at all our clients and contacting them with e-mail or phone calls to talk about the new laws, because a lot of the changes will increase their taxes," said Cathy Goldsticker, tax partner at Brown Smith Wallace LLC. "We ask them if they would like us to run projections. The projections have two purposes. They allow them to know what they'll be up against in April, and it lets us do multiple-case scenarios for planning purposes."
"We're doing this until January 15," she said. "As tax season evolves I expect many issues to come up. One I'm focusing on is the interrelationship of the passive loss rules with net investment tax."
As Congress begins its new session, Goldsticker said, she is watching for further direction on the extenders. "I'm especially focusing on bonus depreciation and the R&D Credit," she said.
E-FILING UPDATE
All told, the IRS received more than 122 million e-filed returns during 2013, up from 119,560,000 in 2012. More than 45.2 million were from those who prepared and e-filed their own returns on home computers, up from 43.2 million a year earlier. E-filed returns from tax professionals increased slightly, totaling more than 77 million returns.
"Even though the IRS will be delaying e-filing again this year, we don't believe it will have the same impact as last year," said John Hewitt, chief executive of Liberty Tax Service. "We don't believe the delay will result in a decrease in filers and, in fact, we think the industry environment this year will generate an increase of one-and-a-half to 2 million more filers."
"We believe that some of the tax season 2013 filers simply delayed filing beyond April as a result of all the confusion, because we have seen a 12 percent increase in the U.S. system-wide revenue during the first half of our fiscal year," Hewitt said.
