High-Income Taxpayers Should Maximize Charitable Contributions, Itemized Deductions in 2010

The latest post on the Tax Policy Blog is High-Income Taxpayers Should Maximize Charitable Contributions, Itemized Deductions in 2010. It is the latest in a series that the Tax Foundation has written about the expiration of the Bush tax cuts. This post is about the likely expiration of  PEP and Pease, popular names for the personal exemption phase-out and a similar phase-out of itemized deductions for higher income filers. The post notes:

PEP and Pease have created significant problems, raising marginal tax rates and adding to tax complexity. In some cases, PEP and Pease push the marginal tax rate up substantially. Next year, under President Obama's budget, a married couple filing jointly with combined AGI of $254,550 would pay a 28 percent rate without PEP and Pease, but a 30.5 percent rate with PEP and Pease.

For more details, read the post, or check out the Tax Policy Foundation or the Tax Policy Blog.

How to fix an error on your individual income tax return

Does this sound familiar?

• You filed the return.
• You cashed the refund check, or you wrote out the check for the taxes you owed.
• When you were filing all of your tax paperwork you discovered you left something off of your return, or you received a notice from the IRS.
• You panicked.

Good news. There is no need to panic. File an amended return. If your CPA completed your return, call your CPA and ask him or her to amend the return. If your return is simple, you can probably do it yourself.

What you will need
Whether you prepare the amended return yourself or send it to your CPA, you will need a few things before you can get started.

• A copy of your return and instructions for the forms. (If you need prior year forms and instructions, you can call 1-800-TAX-FORM (1-800-829-3676). You can also download them from http://www.irs.gov/.
• Form 1040X and instructions (Do not simply re-file a new 1040, 1040A, or 1040EZ!)
• Any additional supporting documents
• Any letters or notices you received from the IRS

How to get started
The first step is to organize your documents. It is a good idea to group your documents into categories such as income, deductions, or credits. You’ll want to separate out documents that go with specific schedules. Once you have done that review the original instructions for the forms you filed. This should help you be certain that you understand the changes that you want to make.

The 1040X is a multi-purpose form. Taxpayers have many reasons for amending returns. This means that you may not need to complete all of the lines on the form. Be sure to check the instructions.

The simplest way to make your changes is to make notes in the margins of your original return. Once you have made all of your changes and reviewed them, you can enter the changes onto the Form 1040X. If you use tax software, be careful to follow the directions provided by the software company. Typically you will make a copy of the original file and modify the copy instead of working on the original. The software will also have an option to prepare an amended return.

Once you file the amended return, file it and all of your supporting documents with your other important papers. If you have a CPA, you may also want to send a copy of the amended return to him or her to keep in your files.

Deadlines
File Form 1040X only after you have filed your original return. It is important to realize that the interest and penalty clock rarely stops ticking. If your changes result in a higher tax liability, then you should file an amended return and pay the tax as soon as you possibly can so that you can avoid additional penalties.

If your changes result in a lower tax liability, then you may be due a refund. Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you filed your original return or within 2 years after you paid the tax, whichever is later. There are some exceptions to this time limit for people who are unable to manage their own affairs. Check with your CPA or review Publication 556 Examination of Returns, Appeal Rights, and Claims for Refund

Free online training from the IRS

Did you know that the IRS offers free online presentations and webinars? Check out the IRS Video Portal  for

• Archived versions of live panel discussions
• Archived webinars
• Video clips
• Audio archives of tax practitioner phone forums

The portal offers a wealth of material for individuals, small businesses and tax practitioners.

Are you ready for the 2010 Alternative Minimum Tax? Get out your wallet.

The 2009 Publication 17 Your Federal Income Tax for Individuals contains this interesting note in a section titled, "What's New for 2010."

Alternative minimum tax (AMT) exemption amount decreased. The AMT exemption amount is scheduled to decrease to $33,750 ($45,000 if married filing jointly or a qualifying widow(er); $22,500 if married filing separately).

The exemption amounts for 2009 were $46,700 ($70,950 if married filing jointly or a qualifying widow(er); $35,475 if married filing separately). This is not really news. The exemptions were scheduled to revert to this amount beginning in 2009, but Congress raised the exemption. A report by the US Treasury, "Tax Relief in 2001 through 2011" provides some explanation.

The AMT was a parallel tax system designed to make certain that very high income taxpayers would not be able to avoid paying income tax. A similar tax called the Minimum Tax was passed in 1969 after it was determined that a group of taxpayers with incomes over $200,000 paid no tax in 1966. Changes over time have lead to the tax now called the Alternative Minimum Tax. Testimony provided to Congress by a treasury official in 2007 explains the tax and its problems in more detail.

The problem with the AMT is that the calculations used to determine the tax base have not changed over time; or rather the law governing the calculations has not changed over time. Instead Congress has opted to pass temporary modifications each year. This creates a huge amount of uncertainty for taxpayers. In addition, even though Congress has opted to adjust the exemption amounts, more and more taxpayers pay AMT. A brief by the Tax Policy Center indicates that while the temporary 2009 exemption meant that only 4 million taxpayers paid the AMT that number will jump to 27.4 million if the exemption reverts to the lower amount. Assistant Secretary for Tax Policy Eric Solomon said it well in 2007 when he spoke to the Ways and Means Committee.

In many respects, the AMT illustrates how a good-faith attempt to address an issue in the income tax system can have enormous unintended and undesirable consequences. Today the AMT is imposing burdens on millions of taxpayers who were not its intended targets.

Write your senator or congressman and tell him or her that you want something done about the AMT. The web pages below contain links to help you find and write your elected representatives.

http://www.senate.gov/index.htm
http://www.house.gov/

You may find these IRS publications helpful. The resources below are for 2009. The 2010 versions will not be available until later in the year.

2009 Publication 17
2009 Form 1040 Instructions
2009 Form 1040A Instructions
2009 Form 6251 Alternative Minimum Tax—Individuals
2009 Form 6251 Instructions
2009 Form 8801 Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts
2009 Form 8801 Instructions

Take a look at the first 1040. The form and instructions are only four pages long.

The first Form 1040 was produced in 1913 after the 16th Amendment was ratified. The amendment said,

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

The 1913 Form 1040 was three pages long, and it was accompanied by one page of instructions. The normal tax rate was one percent.

The normal tax of 1 per cent shall be assessed on the total net income less the specific exemption of $3,000 or $4,000 as the case may be. (For the year 1913, the specific exemption allowable is $2,500 or $3,333.33, as the case may be.)

There was also an additional or super tax on taxable income above $20,000 as shown below.

Rate	on the amount over	and not exceeding
1%	$20,000	$50,000
2%	$50,000	$75,000
3%	$75,000	$100,000
4%	$100,000	$250,000
5%	$250,000	$500,000
6%	$500,000

How to calculate estimated taxes

If you owed tax additional tax this year, it is possible that you should pay estimated taxes. If you are self employed it is very likely that you should pay estimated tax. This is what the IRS has to say about the topic in Publication 505.

General Rule

In most cases, you must pay estimated tax for 2010 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2010, after subtracting your withholding and refundable credits.
2. You expect your withholding and refundable credits to be less than the smaller of:

• 90% of the tax to be shown on your 2010 tax return, or
• 100% of the tax shown on your 2009 tax return. Your 2009 tax return must cover all 12 months.

You can use a worksheet to make a more accurate calculation. If all of your income is subject to withholding, you probably do not need to pay estimated tax. You will want to review your withholding with your employer.

You do not have to pay estimated tax for 2010 if you meet all three of the following conditions.

1.  You had no tax liability for 2009.
2. You were a U.S. citizen or resident alien for the whole year.
3. Your 2009 tax year covered a 12-month period.

 There are special rules for farmers, fishermen, certain higher income taxpayers, aliens, and estates and trusts.

• Farmers and Fishermen
• Higher Income Taxpayers (The percentage of 2009 AGI changes from 100% to 110%.)
• Aliens (Resident aliens should refer to Publiciation 505. Nonresident aliens should review Publication 519 for more information about Form 1040-ES (NR))
• Estates and Trusts (use Form 1041-ES, Estimated Income Tax for Estates and Trusts, to figure and pay estimated tax.)

Do you think the tax system is fair?

A CNN poll conducted by Opinion Research Corporation asked the question, "How fair do you think our present federal tax system is? Overall, would you say that our tax system is very fair, moderately fair, not too fair or not fair at all?"

Some press reports have reported that the results indicate the country is evenly divided on the issue with 49% responding that the system is fair and with 50% saying opining that it is not fair. The details hint otherwise though. Here are the results.

Response	Percent
Very fair	4%
Moderately fair	45%
Not too fair	30%
Not fair at all	20%

A more complete picture of the results gets interesting outside of the 75 percent of respondents in the middle. Five times as many people responded "Not fair at all" than responded "very fair." These numbers do not appear to have changed much over the last 25 years.

What has changed is the way people feel about the taxes they paid. The poll asked, "Are you very angry about the amount of federal incomes taxes you or your family paid last year, or fairly angry, or fairly satisfied, or very satisfied -- or don't you have any particular feeling one way or the other about the amount of federal income taxes you or your family paid last year?" The responses from this poll and from similar LA Times polls in 1985 and 1986 were:

Response	1985	1986	2010
Very angry	6%	11%	15%
Fairly angry	21%	23%	25%
Fairly satisfied	40%	28%	29%
Very satisfied	7%	5%	7%
No feeling	23%	19%	24%

This is an increase in angry responses from 27/33 percent in 1985/1986 to 40 percent.
Taxpayers do not seem to want to take their frustrations out on the IRS though. Respondents were asked, "Do you think the Internal Revenue Service should be abolished, or don't you feel that way?" A majority of people did not think that the IRS should be abolished. The results in this poll and in a 1998 CNN/Time poll were:

Response	1998	2010
Should	39%	26%
Should not	55%	70%
No opinion	6%	4%

The survey was conducted by Opinion Research Corporation and CNN April 9-11, 2010. The margin of sampling error for results based on the total sample is plus or minus 3 percent. To see the entire survey, go to http://i2.cdn.turner.com/cnn/2010/images/04/14/rel7f.pdf.

Do you have too many bank or investment accounts?

I’ve prepared many returns over the last few years, and I’ve been surprised at the number of 1099 forms that clients bring in with their files. Multiple checking and savings accounts and investment accounts are easy to accumulate. People often open new accounts when they apply for auto loans and mortgages or home equity loans. Some people like the idea of banking with a large bank, but they still like to have accounts in local banks or credit unions. Sometimes people change banks to chase rates and don’t close old accounts.

Why is it a problem to have a lot of accounts? It may not be a problem. It makes sense to have separate accounts for personal and business items. It also makes sense to have accounts for special purposes. It becomes a problem when there are too many accounts and there is not a good reason to have them. Here’s why.

Confusion: It is difficult to keep track of many accounts

Cost: Financial institutions often have balance requirements that determine fees. Spreading assets around may mean that individual account balances are too small to qualify for fee waivers. Investment and brokerage accounts, for example, a typically base commission charges on account balances.

Reduced returns: Many financial institutions use account balances to help determine the rates of return they will pay on account balances.

Complications: Having more accounts than necessary adds to the complexity of financial transactions. This leads to increased bookkeeping fees and tax preparation costs.

Take a look at your statements. Does it look like you have too many accounts?

Need tax help? Ask the IRS. Really.

People love to hate the IRS. It is a government bureaucracy. It collects taxes. It enforces tax laws. (Congress writes the laws, but that is another topic.) It makes mistakes. What is there to like?

Actually there is a lot to like. The IRS’ mission statement is to, “Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.” That is a tough job. According to the IRS:

This mission statement describes our role and the public’s expectation about how we should perform that role.

• In the United States, the Congress passes tax laws and requires taxpayers to comply.
• The taxpayer’s role is to understand and meet his or her tax obligations.
• The IRS role is to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share.

One thing the IRS does very well is provide information, lots of information. Sometimes the information is overwhelming. Sometimes it is contradictory. Sometimes it is late. (In defense of the IRS, it promulgates rules and writes instructions according to laws passed by Congress. That has a lot to do with conflicting rules and with delay. For good examples of this, read up on the AMT and the Estate Tax.)
 
Another thing the IRS does well is make it easy to get help. You can call, write, e-mail, fax, or even stop by a local office. If that does not get you the help you need, you can even contact the Taxpayer Advocate Service. (If you have ideas about how to make the process better, the IRS even has a way for you to provide feedback and submit ideas for improvement, the Taxpayer Advocacy Panel.)

Here are five ways to get help from the IRS.

1. Call the IRS: (800) 829-1040
2. Call the IRS.gov Web Site Help Desk: United States and Canada (800) 876-1715 / International (319) 464-3291
3. E-mail the IRS.gov Web Site Help Desk:  irs.gov.website.helpdesk@speedymail.com
4. Check out the IRS.gov Frequently Asked Questions (FAQ) page: http://www.irs.gov/faqs/index.html  
5. Stop by your local office or Taxpayer Assistance Center. Click here to find out how to contact your local Center. http://www.irs.gov/localcontacts/index.html  

For other help, check out the directory at http://www.irs.gov/contact/index.html 

Wondering about your tax refund? Look it up online!

You can find out about the status of your tax refund by using the Where's My Refund? tool on the IRS website.

The IRS says that you can get information about your refund 72 hours after IRS acknowledges receipt of your e-filed return or three to four weeks after mailing a paper return.

You will need to provide the following information from your return to identify yourself:

• Your Social Security Number (or Individual Taxpayer Identification Number)
• Your Filing Status
• The exact whole dollar amount of your refund

Save Energy! Save Money! What you need to know about Energy Tax Credits

Saving energy in your home is green in more ways than one. Saving energy can help you save the planet. It can also save you money by lowering your energy bills and reducing your taxes. This is what you need to know about the residential energy provisions of the American Recovery and Reinvestment Act of 2009.

Taxpayers have two ways to reduce their tax bills.

1. Residential Energy Property Credit
2. Residential Energy Efficient Property Credit

Residential Energy Property Credit
This credit allows taxpayers to take a credit for 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010. These improvements include items such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems. Homeowners contemplating renovations should check to make sure that their improvements will qualify for the credit.

Residential Energy Efficient Property Credit
This energy tax credit will help individual taxpayers pay for "qualified residential alternative energy equipment." This includes solar hot water heaters, solar electric systems, geothermal heat pumps and wind turbines. The law allows for a credit equal to 30 percent of the cost of qualified property. There is no cap on this credit.

How to claim the credits

• The first step in claiming the credits takes place before doing any improvements. Check with suppliers and contractors to make sure that your plans will qualify. Be certain that windows, roofing material, or other efficiency upgrades meet the applicable requirements. You can check with the Energy Star progam.
• Keep records and all of your receipts. You should keep the product labels.
• File Form 5695 when you file your tax return.
• Enjoy your energy improvements and your tax credits.

How to save money on accounting fees!

Many people are surprised at how much it costs for their CPA to prepare their returns. Hiring an expert to do your taxes is a good idea, and most of the fees are money well spent. However, some habits may be costing you a lot of money, and they could lead to errors. What are these habits?

• Disorganization
• Sloppy bookkeeping
• Unresponsiveness

This is how those habits cost you and what you can do about them.

Disorganization

It is amazing how many people simply gather up any documents that they think might somehow be related to their income tax, stuff them in folders or large envelopes, and send them to their CPA. The CPA will review and make copies of everything. Many of the documents will turn out to be unnecessary. Even so, once their CPAs start going through the files, they find that many important items are not included. The CPA will then have to contact the client and ask for the missing documents. This adds to the expense of preparing the return because the accountant spends additional time and expense on the unnecessary items and them spends extra time tracking down the missing items.

A few common examples are listed below.

Housing related items

Taxpayers that own homes may be eligible to deduct mortgage interest, PMI, and property taxes. The only documents that the accountant needs are the mortgage interest statements from the holder of the mortgage and property tax receipts. It is generally not necessary to provide monthly statements for the mortgage or tax notices. Taxpayers should be sure to let their accountants know what they paid, and in instances where they may not have paid an item (such as delaying a property tax payment) what they have not paid.
Taxpayers that sold or purchased a home should generally provide the settlement statements to their accountants. This will help the accountant evaluate whether there are deductible expenses related to the transaction, and it will help confirm whether the taxpayer qualifies for gain exclusions. If the home was converted to or from rental use or vacation property, then it is especially important to provide this information.

Clients with home offices should keep additional records.

Bank and brokerage accounts

Clients with bank and brokerage accounts will often provide monthly, quarterly, and annual reports. Clients may, or may not, provide the relevant 1099s. The CPA will review all of the documents. If the 1099's are not provided, the CPA will contact the client and ask for them. It is especially important for clients that receive stock based compensation and clients that do a lot of trading to review their documents and make sure that the CPA has what he or she needs to complete the return, and that unnecessary information is not included in the file.

Business expenses

Unless your accountant set up and maintains your bookkeeping, he or she has no way of knowing the details of your expenses. Clients frequently bring folders and envelopes full of receipts to their CPA. All that is really necessary is a set of financial statements and a summary of expenses. The reason that this increases the cost of the return is that the accountant will have to organize the receipts, and this takes time. It is much less expensive to organize expenses than it is to pay the accountant to organize them for you.
Clients who use automobiles for business should keep records and provide them to their accountant.

Childcare expenses

Clients with children who pay for childcare should provide information about the care provider including the address, tax ID number and the amount paid. If the client used a flexible spending account, or if the employer provided a childcare benefit, then the client should provide that information as well.

Sloppy (or no) bookkeeping

Many business owners try to save money by limiting their record keeping. When the do decide to keep detailed records, they often consist of spreadsheets. Once the records get to complex for spreadsheets then business owners will buy a bookkeeping program. In the long run, none of this saves money. If the books are not well organized then the accountant may have to virtually redo them in order to prepare the tax return. This adds to the cost of the return, and it is more expensive than it would have been to have had the books properly prepared before bringing them to the CPA for tax filing.
Another thing that adds to the cost of preparing tax returns is when accounts are set up incorrectly. When accounts are set up correctly, then they can be configured in a way that makes it simple to produce reports in standard formats. These formats include tax reporting formats as well as formats designed to help manage a business.

A final problem for many taxpayers is failing to separate personal and business expenses. Ideally, business owners will have different bank accounts for business and personal use. If that is not possible, then at the very least, they should keep personal items out of their business records by flagging them appropriately so that they can be identified and excluded from reports.

Unresponsiveness

Many clients do not respond when their accountant tries to contact them. The reason the accountant is calling is either to find missing information or to clarify something that is not clear. When clients do not respond, their returns remain unfinished. Tax preparers have to set the return aside and wait for the additional information. When the client does respond, sometimes weeks later after several emails or telephone calls, the preparer will reopen the file and begin working on the return. Unfortunately, it will probably not be fresh in the preparer's mind, and it will take longer to complete than if the missing information had been available sooner. Unresponsiveness increases the cost of preparing your return because it is difficult to work with missing information and it takes longer to prepare the return. In addition, every one of those phone calls and emails take time.

What you can do to save money

The most important thing is to be away of habits that may be costing you money. Once you know what they are, change them!

Get organized!

Talk to your CPA or the professional that prepares your filing. He or she can tell you exactly what you need to do in order to simplify your tax filing and to make it less expensive to prepare your return. Take advantage of the checklists and organizers your accountant provides. Spend a little time reviewing your documents before you take them to your accountant.

Keep records throughout the year, and organize them so that they will be ready for your accountant. If you drive an automobile for work, get one of those auto record books and keep it. Keep your business and personal records separate.

Organize your records. Think about buying a bookkeeping program. Consider hiring a bookkeeper.

It is worth your time to talk to your CPA or to a bookkeeper to learn how to set up your records. If you have a small business, seriously consider purchasing bookkeeping software such as QuickBooks or Peachtree. If you do, it is worth your while to ask your accountant or bookkeeper to help you set up your books. If you simply don't want to organize your own records, or if they are too complex, then hire a bookkeeper. The cost of paying a bookkeeper to do your books throughout the year will be less than the cost of asking your accountant to do it a month before your taxes are due.

Return your calls! Respond to email!

When the CPA calls or emails, assume it is important and respond! If you do not return your calls or answer your email, then one contact becomes two or three or more. Your CPA will be able to complete your return faster and for less cost if you respond when he or she tries to contact you.

Surprised by the size of your tax refund? Adjust your withholding.

Every year during tax filing season people complete their income tax returns and discover one of three things.

1. They owe tax,
2. They paid just the right amount during the year, or
3. They will receive a refund.

In the US tax system, employers withhold a variety of taxes, including income tax from employees' pay. Self-employed individuals, and people who have income from sources other than an employer, are supposed to make estimated tax payments throughout the year. Ideally, if the withholding is calculated correctly or if the estimated taxes are figured accurately, the amount forwarded to the government during the year will equal the amount that will be due. If the amount sent is more than the tax that will be due, then the taxpayer has made an interest free loan to the government. If the amount sent is too small, then the taxpayer may be subject to penalties.

There are many reasons that people may choose to have a larger than necessary amount withheld. For example, some people like the idea of the receiving a large refund and think of it as a forced savings plan. Another reason is that people may have an uncommon amount of deductions or credits. There may also be many reasons that withholding amounts are too small. Employees that have several jobs may find that their employers may not withhold enough. Employees may also have income from other sources. In either case, employees should either adjust their withholding or make estimated tax payments.

If your refund was too big or too small, then you should adjust your withholding or recalculate your estimated taxes. Follow the instructions that accompany the W-4. You can also use the IRS' Withholding Calculator. If you need more detailed information, it is available in Publication 919.

Overwhelmed? Afraid you won’t make the April 15, 2010 filing deadline?

File an extension. Individuals may qualify for an automatic 6-month extension of time. File Form 4868, Application for Automatic Extension of Time to File U.S. Income Tax Return. The extension only extends your filing deadline. It does not extend the deadline for paying taxes that you owe.
If you:

• Live outside the United States,
• Are out of the country when your extension expires, or
• You are serving in a combat zone or other qualified hazardous duty area

Special rules may apply.
Corporations, partnerships, and other entities such as trusts are subject to different rules.

It is not too late to contribute to an IRA or Roth IRA for 2009.

If you have not already made your contributions to an IRA or a Roth IRA for 2009, you still have time. The deadline for contributing to an IRA is the due date for filing your return, not including extensions. For most people, that means the due date is April 15, 2010. If you make your contribution for 2009 in 2010, be sure to designate your contribution as a 2009 contribution.

Be sure to talk to your CPA and your financial institution before April 15^th. If you want to read all the details for yourself, check out IRS Publication 590.

You may also qualify for a Savers Credit. Check out Form 8880 when you complete your 1040 or 1040A.

Incredible tax statistic: Nearly 1.4 million people did not file 2006 returns, and they are owed as much as $1.3 billion!

The IRS estimated that the median return that was not claimed for 2006 is $604. People may not have filed because their income levels were below the level that required them to file even though their employers may have withheld taxes from their wages.

Taxpayers may be due a larger refund than they realize. In 2006 many taxpayers qualified for a refund of between $30 and $60 based on excise taxes included in phone bills between March 2003 and July 2006. Some low income tax payers may also be able to claim the Earned Income Tax Credit (EITC).

If you have not filed your 2006 return, be sure to file by April 15, 2009. The law generally provides a three-year window for claiming a refund.

Ask your CPA or tax advisor for details. You can also find information on the IRS web site.

Home Buyer Tax Credits

If you purchased a home in 2008, 2009 or 2010, you may be able to take advantage of the first-time homebuyer credit. Here's what you need to know:

• The credit only applies to homes used as a taxpayer's principal residence.
• It reduces a taxpayer's tax dollar for dollar.
• The credit is refundable. This means the credit will be paid to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.

You will need to file a Form 5405 with your return. If you have already filed and did not take advantage of the credit, you can amend your return with a Form 1040X. You will also need to provide documentation such as a HUD-1 or settlement statement. Be sure to check with your CPA or tax advisor.

For more details, check out this page on the IRS website.