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In the instructions to Form 1099-MISC, the IRS has made it clear that payments made with a credit card, or through any third-party payer, are not reported on Form 1099-MISC. These amounts are now reported on Form 1099-K. Thus, if a business pays a service-provider with a credit card, debit card, gift card, or electronically via a service like PayPal, the payment is not included on a 1099-MISC.
Form 1099-K is new for 2011. The form is issued by a credit card company or other third-party payer (such as PayPal) to payees if the payee has more than 200 transactions and more than $20,000 of gross income paid to them. The 1099-K is not issued by either the buyer or seller.
You’ll face a higher tax bill next spring if Congress doesn’t act to revive a series of tax breaks that expired Dec. 31, 2011. Among the breaks that Congress didn’t extend in all the sturm-und-drang over the payroll tax holiday are:
Alternative minimum tax patch
The AMT is a parallel tax system created more than 40 years ago to prevent excessive use of tax breaks by the very wealthy, ensuring they pay at least some tax. Taxpayers whose income exceeds the AMT exemption – in 2011, $48,450 for individuals and $74,450 for married couples filing jointly – must calculate both regular tax and AMT liability and pay the larger of the two amounts. But exemption levels have, at least tentatively, dropped to $33,750 for individuals and $45,000 for married couples filing jointly in 2012, which will expose 31 million taxpayers to the higher AMT this year, according to Tax Policy Center estimates.
Higher mass transportation benefit
This one’s of particular interest to straphangers, van-riders and other users of public transit. A 2009 federal stimulus provision raised the maximum an employee could receive for transit, tax-free, from $120 to $230. That matched the tax-free limit for parking. With the expiration of this break, the maximum for 2012 dropped to $125. Employees who’ve asked to have an amount higher than that withheld from their paycheck to cover their total commuting costs will see their net pay come down, as the difference is now taxed.
Deduction for direct IRA payouts to charity
Retirees who are 70½ or older could direct up to $100,000 of their IRA distributions directly to charity and exclude the donated amounts from taxable income. Not anymore in 2012, unless Congress reinstates this deduction.
Write-offs for state sales taxes
This particularly significant expired break allowed you to deduct either state income tax or state sales tax from your federal taxable income.
Teacher’s supplies deduction
Teachers, even if they didn’t itemize, were able to take an additional deduction of up to $250 for classroom supplies they paid for out of their own pockets.
Tuition and fees deduction
Taxpayers (up to certain income limits) who can’t claim the more advantageous American Opportunity or Lifetime Learning credits can still reduce taxable income by up to $4,000 for tuition and other qualifying educational expenses — if, of course, Congress reinstates this break.
Mortgage insurance premium deduction
Homeowners who don’t exceed certain income limits had been able to deduct premiums they pay on mortgage insurance policies issued after 2006 on their primary residence.
Personal tax credits applied against the alternative minimum tax
Credits such as the tuition and dependent-care credits were allowed to offset your AMT liability.
Research and Development credit
Like the AMT patch and direct IRA payouts, this credit, which allowed high-tech companies and others to subsidize research in areas that might go unexplored, has broad support. But it still falls to Congress to reauthorize it periodically.
We think Congress will manage to revive these breaks — eventually — with the exception of the transit subsidy, whose chances are no better than 50-50. But you may spend much, if not all, of 2012 in a state of uncertainty. The political atmosphere in Washington is so toxic that it is doubtful the parties will reach agreement before the end of 2012, when Congress will have to take up the question of extending the Bush tax cuts.
If lawmakers wait too long, in 2013, we may have a repeat of the 2006 and 2010 filing seasons, when many taxpayers had to wait for the IRS to reprogram its computers before they could file their tax returns. In both cases, the start of the filing season was delayed for many until early to mid February.
“For a large majority of people, TurboTax or the Internal Revenue Service’s Free File is more than sufficient,” says Certified Public Accountant Jonathan Horn. “However, the tax code is so complex that you may not properly analyze all the deductions and credits available to you.”
Returns become difficult to complete when a filer has more than a W-2 and deductions for mortgage interest and children, says Larry Campagna, an attorney at firm Chamberlain, Hrdlicka, White, Williams & Aughtry. For those with deductions like extensive stock trades or real estate transactions, he says tax software may not be the best choice. “A lot of issues are subject to interpretation, and TurboTax may not prompt you with the right questions.”
To find a reputable tax preparer, experts recommend asking friends, family or a professional association for referrals.
Everyone’s tax situation is different. “You need to match the level of complexity of your return with the qualifications of the preparer,” says Sherrill Trovato, president of the National Association of Enrolled Agents. When evaluating potential candidates, know what special circumstances (ie: small business owner, trust fund…) you have on your return and make sure they have expertise with these issues.
Before hiring a tax preparer, conduct an interview to see if it’s a good fit, recommends Cindy Hockenberry, Tax Knowledge Center supervisor at the National Association of Tax Professionals.
Consider your comfort level for divulging your finances, says Trovato. If you’re looking to establish a longstanding relationship with a preparer, she advises working with a sole practitioner over a national firm like H&R Block and Jackson Hewitt Tax Service.
The IRS has guidelines in place to help protect consumers from fraudulent preparers. “All paid tax preparers are required to be registered with the IRS,” says Hockenberry. “Ask whether they have a Preparer Tax Identification Number (PTIN).”
The IRS issues PTINs to qualified tax preparers, and only preparers with PTINs can sign a return, according to IRS regulations. If a preparer receives any compensation to complete a return, they must also sign the return. PTINs are issued to enrolled agents (EAs), registered tax return preparers (RTRP), certified public accountants (CPA), and attorneys. “If your preparer doesn’t have a PTIN, walk away,” advises Hockenberry.
Registered tax return preparers (RTRP)
Each type of preparer has a different level of expertise. RTRPs are required to pass an IRS exam and attend 15 hours of continuing education every year, according to newly-established IRS guidelines. They are able to sign and prepare tax returns and represent clients to the IRS in limited circumstances, such as for an audit but not for an appeal. At the moment, there are no RTRPs on the market because the IRS recently created the exam and is in the process of determining a passing score.
Enrolled Agents (EA)
EAs can either sit for an IRS exam or have five years work experience for the IRS, according to IRS guidelines. They are also able to represent an individual to the IRS for any tax matter. EAs must complete 72 hours of continuing education every three years.
Certified Public Accountants (CPA)
CPAs have met state guidelines that include having bachelor’s degree with a designated amount of business and accounting courses, passing the state’s CPA exam, and working for an accounting firm for a certain period of time. Each state sets continuing education requirements for CPAs.
“An accountant has a broader picture of financial matters in that an EA is focused solely on the tax code,” says Horn. CPAs can also advise on retirement planning, estate and gift tax planning, and education expense planning.
“Attorneys can also help prepare taxes when there are more complicated and sensitive issues with a return,” says Campagna. Issues like distributions from foreign trusts or bank accounts, unreported income or overstated deductions in a current or prior years return, or legal fees, could make hiring a lawyer to file your return a good idea.
Because lawyers tend to have high fees, experts advise hiring one only when there are significant tax liabilitiesor refunds. “The average consumer doesn’t need a lawyer to do tax returns,” says Campagna.
What to Ask
Find out if the preparer is a member of a professional organization. An organization may require their members to adhere to a code of ethics or have more stringent continuing education requirements than what’s required by the IRS, says Trovato. Being a member of a professional organization also shows a level of commitment, adds Hockenberry.
Ask about a tax preparer’s fees. Fees for a national firm may not be cheaper than what a sole practitioner may charge, and sole practitioners generally have lower fees than accounting firms, says Horn.
According to the National Society of Accountants, fees per form can range between $233 for an itemized Form 1040and Schedule A that’s filed by an individual to $695 for a Form 1120 that’s filed by a corporation.
Ask whether a tax preparer charges by the hour. “If the preparer is not familiar with your tax situation, you don’t want to pay to get them up to speed,” says John Ams, executive vice president of the National Society of Accountants.
In any case, it’s illegal for a tax preparer to charge a fee equal to a percentage of your refund.
Ask how long the tax preparer has been in business. “Experience equals knowledge because the laws keep changing,” says Hockenberry. Contact your state’s Better Business Bureau or licensing board or the IRS to check for complaints or disciplinary actions against the tax preparer.
Ask whether the preparer works year round. “Since questions arise all the time that affect your return, such as marriage, divorce, death, starting or closing a business, or buying or selling properties, I would rather get a call before someone does something instead of in March, during tax season,” says Trovato. A tax preparer can help prevent unexpected tax liabilities if you seek their advice before making major financial decisions.
Ask whether a preparer has professional liability insurance. If there is an issue with the return, the taxpayer is responsible for any amounts due, but a preparer’s insurance policy may cover any penalties and interest owed because the preparer made a mistake on the return, according to Hockenberry. If the preparer does not have a policy and you owe penalties and interest because of a mistake in your return, you may have to take them to court.
Once you choose your tax preparer, there are a few tips to follow. While the return is being completed, your tax preparer should ask for documentation and receipts, says Hockenberry. Once the return is complete, make sure your tax preparer signs the return and writes their PTIN.
“Never sign a blank return,” says Horn. “You’re responsible for what’s on the return.” Once tax forms are completed, everyone advises that taxpayers spend time reviewing their returns to see that the numbers make sense based on their income and expenses.