Year-end planning is now behind us. Many believe that the failure of the joint congressional committee to reach a deficit reduction agreement pushes fundamental tax reform off at least until after the 2012 elections. Some tax changes are still possible with respect to jobs promotion and extending expiring provisions, but those efforts will be primarily focused on 2012. So, what do we know now about what is new for the 2011 tax return filing season?
Most tax preparers have already shifted to e-filing by now, but the mandatory e-filing requirements keep increasing. For tax year 2011 returns filed in 2012, a return preparer must e-file if they are filing 11 or more returns. This is lower than the 100 returns for the last filing season. Clients may instruct the preparer in writing that they want to opt out of e-filing. Also, a return preparer can apply to opt out due to hardship by filing Form 8944.
BROKER REPORTING OF BASIS
Form 1099-B has been revised to provide for brokers to report the basis of transactions during the year. This information should match the basis reported on the return. Although brokers this year are only required to report basis for transactions involving stock sales where the stock was acquired after Jan. 1, 2011, and only if the broker or a predecessor broker handled the acquisition, it is possible that brokers will report more basis information on the 1099-B than they are technically required to report. These transactions will also no longer be reported directly on Schedule D, but on Form 8949, a new supporting form for Schedule D.
CREDIT CARD/MERCHANT PAYMENTS
Form 1099-K is now required to be filed by payment settlement entities, such as credit card processors and online payment processors, reporting payments made. There is a de minimis reporting exception for total payments of less than $20,000 or fewer than 200 transactions. The reports will generally be made of gross payments, so adjustments for fees, chargebacks and returns may have to be explained to account for any differences from the amounts reported on the Form 1099-K. Your clients will probably want to start keeping track of these adjustments in separate accounts so that they can verify the gross payment information reported on the Form 1099-K and trace the adjustments.
New lines have been added for Forms 1040 Schedules C, E and F; Form 1065; and Forms 1120 and 1120S to reflect the information from the Form 1099-K. A merchant that fails to provide a federal employer identification number or Social Security number to the processor or fails to pay the tax may be subject to back-up withholding.
In addition to the prior obligation to report foreign accounts on Form TDF90-22.1 (FBAR), a new Form 8938 will require foreign assets to be reported if those assets have a total value of more than $50,000 ($100,000 if married filing jointly). Foreign assets have a broader definition than the FBAR reporting of foreign accounts, and include stock or securities issued by someone other than a U.S. "person," any interest in a foreign entity, and any financial instrument or contract that has an issuer or counterparty other than a U.S. "person." Failure to report foreign assets also comes with a separate set of penalties from those associated with failure to make FBAR reports.
2010 ROTH CONVERSIONS
Clients who did Roth conversions in 2010 and elected to spread the tax over 2011 and 2012 will have to report half of the tax on the conversion on their 2011 tax returns. Tax on any additional conversions done in 2011 will also have to be included on the 2011 tax return. These could have been conversions from a traditional IRA to a Roth IRA, or conversions from a 401(k) or 403(b) plan account to a Roth account within those plans. Distributions of those Roth conversion amounts during 2011 could result in some acceleration of the portion of the tax that would normally have been deferred until 2012.
FORM 8939 AND INHERITED ASSETS
Practitioners this year may encounter clients who have received a Form 8939 from an executor of an estate of which the client is an heir, reporting the carryover basis of those inherited assets where the estate elected 2010 estate tax repeal. This will provide the basis information should the heir have sold those inherited assets in 2011 or in the future. Practitioners might also suggest that clients obtain the backup support from the executor of the estate, spelling out how that basis determination was made, in the event that the client is ever audited by the IRS on the tax reported on the sale of those inherited assets.
EMPLOYEE RETENTION CREDIT
Although the employee retention credit was related to 2010 hiring, it required retaining the employee for at least 52 weeks to qualify for the credit, moving eligibility for the credit to 2011 tax returns. Eligibility for the credit also restricted wage reductions during the last 26 weeks of the 52-week period. The credit is claimed on Form 5884-B and is the lesser of $1,000 or 6.2 percent of the retained worker's wages during the period.
FORM W-2 REPORTING
Although it is only optional for Form W-2s issued in 2012 (it will be mandatory in 2013) some employees may receive W-2s for 2011 that for the first time in Box 12 include a code (DD) and amount for employer-sponsored health care coverage. This new requirement is part of the health care reform that is designed to provide the IRS with information to determine if the employer and employee have complied with the mandates of that legislation. Since those mandates are not yet in effect for 2011, such additional information on the W-2 should not have an effect on 2011 tax return filing requirements.
FIRST-TIME HOMEBUYER CREDIT
The repayment of the First-Time Homebuyer Credit from 2008 is not new for 2011 tax returns, but it does have a new line on the Form 1040, Line 59b. The repayment installment can be entered directly on Line 59b without the use of Form 5405 if the taxpayer continued to own the home and use it as their main home throughout 2011.
The other main change to the Form 1040 for 2011 is that there is no longer a line for the Making Work Pay Credit, which expired at the end of 2010.
Paid return preparers who were required to obtain a Paid Preparer Tax Identification Number were required to renew that PTIN for the current filing season. The IRS has also put in place a new testing requirement applicable to paid preparers other than attorneys, CPAs and enrolled agents. Paid return preparers can take the exam now and have until Dec. 31, 2013, to pass it. There is no restriction on the number of times a preparer can take the exam. The initial exam is based on 2010 return information, and some professional organizations have suggested holding off taking the exam until it is revised to reflect 2011 tax return information.
On the whole, the 2011 tax return filing season does not seem to be complicated by too many changes from the prior season. With increasing calls for fundamental tax reform and growing demand to address the federal deficits, however, this may be the last tax filing season about which we will be able to say that for a while.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.
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