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When you file a tax return, you usually have a choice to make: whether to itemize deductions or take the standard deduction. You should compare both methods and use the one that gives you the greater tax benefit.
The IRS offers these six facts to help you choose.
1. Figure your itemized deductions. Add up the cost of items you paid for during the year that you might be able to deduct. Expenses could include home mortgage interest, state income taxes or sales taxes (but not both), real estate and personal property taxes, and gifts to charities. They may also include large casualty or theft losses or large medical and dental expenses that insurance did not cover. Unreimbursed employee business expenses may also be deductible.
2. Know your standard deduction. If you do not itemize, your basic standard deduction amount depends on your filing status. For 2012, the basic amounts are:
• Single = $5,950
• Married Filing Jointly = $11,900
• Head of Household = $8,700
• Married Filing Separately = $5,950
• Qualifying Widow(er) = $11,900
3. Apply other rules in some cases. Your standard deduction is higher if you are 65 or older or blind. Other rules apply if someone else can claim you as a dependent on his or her tax return. To figure your standard deduction in these cases, use the worksheet in the instructions for Form 1040, U.S. Individual Income Tax Return.
4. Check for the exceptions. Some people do not qualify for the standard deduction and should itemize. This includes married people who file a separate return and their spouse itemizes deductions. See the Form 1040 instructions for the rules about who may not claim a standard deduction.
5. Choose the best method. Compare your itemized and standard deduction amounts. You should file using the method with the larger amount.
6. File the right forms. To itemize your deductions, use Form 1040, and Schedule A, Itemized Deductions. You can take the standard deduction on Forms 1040, 1040A or 1040EZ.
For more information about allowable deductions, see Publication 17, Your Federal Income Tax, and the instructions for Schedule A. Tax forms and publications are available on the IRS website at IRS.gov You may also call 800-TAX-FORM (800-829-3676) to order them by mail.
Additional IRS Resources:
- Interactive Tax Assistant tool – How Much is My Standard Deduction?
- Schedule A (Form 1040), Itemized Deductions and instructions
- Form 1040, U.S. Individual Income Tax Return and instructions
- Publication 17, Your Federal Income Tax
The Franchise Tax Board has announced that taxpayers affected by the retroactive personal income tax increase (Proposition 30), may pay the amount due with their 2012 tax return. Taxpayers subject to underpayment of estimated tax penalties may request relief by completing Form 5808 Underpayment of Estimated Taxes by Individual and Fiduciaries and completing Part 1, question 1 with the explanation that the underpayment is due to Proposition 30.
Yesterday, the President signed the American Taxpayer Relief Act, which was passed on New Year’s Day. Here is brief summary of selected portions of it, for your review. We can help answer any questions that you may have.
Individual Tax Rates
The Act preserves and permanently extends the Bush-era income tax cuts except for single individuals with taxable income above $400,000; married couples filing joint returns with taxable income above $450,000; and heads of household with taxable income above $425,000. Income above these thresholds will be taxed at a 39.6 percent rate, effective January 1, 2013. The $400,000/$450,000/$425,000 thresholds will be adjusted for inflation after 2013.
The new law, however, does not extend the payroll tax holiday. Effective January 1, 2013, the employee-share of Social Security tax withholding increased from 4.2% to 6.2% (its rate before the payroll tax holiday).
Capital Gains and Dividend Tax Rate
Effective January 1, 2013, the maximum tax rate on qualified capital gains and dividends rises from 15 to 20 percent for taxpayers whose taxable incomes exceed the thresholds set for the 39.6 percent rate (the $400,000/$450,000/$425,000 thresholds discussed above). The maximum tax rate for all other taxpayers remains at 15 percent; and moreover, a zero-percent rate will continue to apply to qualified capital gains and dividends to the extent income falls below the top of the 15- percent tax bracket. Note – The 2010 Affordable Care Act imposes a 3.8% Medicare tax on interest, dividends, capital gains, and other passive income, starting in 2013, and it applies at taxable income over $200,000 for single filers and over $250,000 for joint filers.
Estate and Gift Tax
Federal transfer taxes (estate, gift and generation-skipping transfer (GST) taxes) seem to have been in a constant state of flux in recent years. The Act provides some certainty. Effective January 1, 2013, the maximum estate, gift and GST tax rate is generally 40 percent, which reflects an increase from 35 percent for 2012. The lifetime exclusion amount for estate and gift taxes is unchanged for 2013 and subsequent years at $5 million (adjusted for inflation). The GST exemption amount for 2013 and beyond is also $5 million (adjusted for inflation). The new law also makes permanent portability and some enhancements made in previous tax laws.
Other Act Elements Affecting Individuals
• AMT (Alternative Minimum Tax) – Higher exemptions are made permanent, and indexed for inflation
• IRA distributions to charitable organizations, (for those over age 70) – restored through 2013
• Exclusion for cancellation of debt on principal residence – extended through 2013
• Reduction of itemized deductions for incomes over certain levels, (which was not in place since 2010) – will apply starting in 2013
Business Tax Provisions
Code Sec. 179 business equipment expensing. In recent years, Congress has repeatedly increased dollar and investment limits under Code Sec. 179 to encourage spending by businesses. For tax years beginning in 2010 and 2011, the Code Sec. 179 dollar and investment limits were $500,000 and $2 million, respectively. [This means that you can expense up to $500,000 of equipment or software purchased, so long as you don’t spend more than $2 million in total. Expenditures over the $2 million level reduces the allowable expense amount dollar-for-dollar.] The Act restores the dollar and investment limits for 2012 and 2013 to their 2011 amounts ($500,000 and $2 million) and adjusts those amounts for inflation. However, this increase is temporary. The Code Sec. 179 dollar and investment limits are scheduled, unless changed by Congress, to decrease to $25,000 and $200,000, respectively, after 2013. The new law also provides that off-the-shelf computer software qualifies as eligible property for Code Sec. 179 expensing. The software must be placed in service in a tax year beginning before 2014. Additionally, the Act allows taxpayers to treat up to $250,000 of qualified leasehold and retail improvement property as well as qualified restaurant property, as eligible for Code Sec. 179 expensing.
Bonus depreciation. Bonus depreciation of business equipment is one of the most important tax benefits available to businesses, large or small. In recent years, bonus depreciation has reached 100 percent, which gave taxpayers the opportunity to write off 100 percent of qualifying asset purchases immediately. For 2012, bonus depreciation remained available but was reduced to 50 percent. The Act extends 50 percent bonus depreciation through 2013. The Act also provides that a taxpayer otherwise eligible for additional first-year depreciation may elect to claim additional research or minimum tax credits in lieu of claiming depreciation for qualified property.
While not quite as attractive as 100 percent bonus depreciation, 50 percent bonus depreciation is valuable. For example, a $100,000 piece of equipment with a five-year MACRS life would qualify for a $55,000 write-off: $50,000 in bonus depreciation plus 20 percent of the remaining $50,000 in basis as “regular” depreciation, with the half-year convention applied in the first and last year.
Bonus depreciation also relates to the passenger vehicle depreciation dollar limits under Code Sec. 280F. This provision imposes dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile/truck in service within a business and for each succeeding year. Because of the new law, the first-year depreciation cap for passenger automobile/truck placed in service in 2013 is increased by $8,000.
Bonus depreciation, unlike Code Sec. 179 expensing, is not capped at a dollar threshold. However, only new property qualifies for bonus depreciation. Code Sec. 179 expensing, in contrast, can be claimed for both new and used property and qualifying property may be expensed at 100 percent.
Research Tax Credit. The research tax credit was restored for 2012 and extended through 2013.
If you have any questions, please contact us.
IRS Releases Specifications for Registered Tax Return Preparer Test – Doesn’t it just give you the chills?
By Stacie Kitts, CPA
Here it is, what all un-registered (non CPA’s, attorneys, or enrolled agent) tax preparers have been waiting for. The specs for the competency test that will award those who pass the title of “Registered Tax Return Preparer.”
Wowwee doesn’t it just give you the chills….
No – well maybe that’s because CPA’s and attorneys can sign tax returns even if they don’t have a single clue what they are doing. They get to do this without passing a test (other than the initial licensing exam which he/she could have taken a hundred years ago – so not even relevant today) or taking a single hour of tax related continuing professional education. You know, training that would keep you up to speed on the actual tax laws that apply to tax return preparation.
So what do you think the odds are that many of these licensed “professionals” would have a difficult time passing the new competency test?
Ya, scary jacked up regulation that leaves out a large number of people who are trusted to prepare your tax return.
Fixing the mistakes of these so called professionals is a large part of my practice. I guess I should be grateful instead of loosing my mind over the absurdity of it all.
WASHINGTON — The Internal Revenue Service today released the specifications for the competency test individuals must pass to become a Registered Tax Return Preparer.
The test is part of an ongoing effort by the IRS to enhance oversight of the tax preparation industry. Preparers who pass this test, a background check and tax compliance check as well as complete 15 hours of continuing education annually will have a new designation: Registered Tax Return Preparer.
The specifications identify the major topics that will be covered by the test, which will be available starting this fall. Although individuals who already have a provisional preparer tax identification number (PTIN) from the IRS do not have to pass the exam until Dec. 31, 2013, they may take the exam at any time once it is available.
The test will have approximately 120 questions in a combination of multiple choice and true or false format. Questions will be weighted and individuals will receive a pass or fail score, with diagnostic feedback provided to those who fail.
Test vendor Prometric Inc. worked with the IRS and the tax preparer community to develop the test. The time limit for the test is expected to be between two and three hours. The test must be taken at one of the roughly 260 Prometric facilities nationwide.
To assist in test preparation, the following is a list of recommended study materials. This list is not all-encompassing, but a highlight of what the test candidates will need to know.
- Publication 17, Your Federal Income Tax
- Form 1040, U.S. Individual Income Tax Return
- Form 1040 Instructions
- Circular 230, Regulations Governing Practice before the Internal Revenue Service (rev. 8/2/11)
- Publication 334, Tax Guide for Small Business
- Publication 970, Tax Benefits for Education
- Publication 1345, Handbook for Authorized IRS e-file Providers
- Form 6251, Alternative Minimum Tax – Individuals
- Form 6251 Instructions
- Form 8879, IRS e-File Signature Authorization
Some reference materials will be available to individuals when they are taking the test. Prometric will provide individuals with Publication 17, Form 1040 and Form 1040 instructions as reference materials.
The fee for the test has not been finalized but is expected to be between $100 and $125, which is separate from the PTIN user fee. Currently there is no limit on the number of times preparers can take the test, but they must pay the fee each time. Individuals must pass the test only once.
Only certain individuals who prepare the Form 1040 series are required to take the test. Attorneys, Certified Public Accountants and Enrolled Agents (EAs) are exempt from testing and continuing education because of their more stringent professional testing and education requirements. Also exempt are supervised employees of attorneys, CPAs, attorneys or EAs who prepare but do not sign and are not required to sign the Form 1040 series returns they prepare and individuals who prepare federal returns other than the Form 1040 series.
Approximately 730,000 return preparers have registered and received PTINs in 2011. Approximately 62 percent do not have professional credentials. The IRS does not yet know how many preparers will fall into other exempt categories, but those individuals will be required to identify themselves when they renew an existing PTIN or obtain a new PTIN beginning in October 2011.
The IRS will notify those preparers who have a testing requirement and provide more details. Once the test is available, preparers who have on-line accounts can use their accounts to schedule a test time and select a Prometric site.
At the time the current version of Publication 17 went to press, there were certain tax benefits that had not been finalized and several tax benefits were subsequently extended. See Legislative Changes Affecting the 2010 Publication 17 on IRS.gov for the details needed for study purposes.
Even if you have been a bad taxpayer, California is willing to give you a break.
Voluntary Compliance Initiative 2 (VCI 2) is an opportunity for taxpayers who underreported their California income tax liabilities, through the use of abusive tax avoidance transactions (ATAT) or offshore financial arrangements (OFA), to amend their returns for 2010 and prior tax years and obtain a waiver of most penalties.
Filing period: August 1, 2011 to October 31, 2011
Applicable tax years: 2010 and prior
You are eligible to participate in VCI 2 if you (or one of your related entities):
- Filed a tax return that underreported your income or tax liability through the use of an ATAT or OFA.
You are eligible even if you:
- Are currently under FTB examination for an ATAT or OFA.
- Are currently under administrative protest or appeal for an ATAT or OFA.
- Participated in the IRS’s Offshore Voluntary Disclosure Initiative.
You must take the following steps to participate:
- File a completed Participation Agreement form with us between August 1, 2011 and October 31, 2011.
- Attach the form to your amended return to report all income from all sources, without regard to the ATAT and including all income from the OFA.
- Pay all tax and interest by October 31, 2011. See payment options for more information.
Participation in VCI 2 will allow you to avoid:
- The cost of litigation.
- Certain penalties and the associated interest.
- Criminal prosecution.
You can avoid the following penalties under VCI 2:
- Noneconomic Substance Transaction Understatement Penalty
- Accuracy Related Penalty
- Interest Based Penalty
- Fraud Penalty
If you are eligible but do not participate, you will be subject to the full range of penalties and interest, and may be subject to criminal prosecution.
The Large Corporate Understatement Penalty (LCUP) and the Amnesty Penalty cannot be waived under this initiative.