Obama Tweets for Tax Cut Extension

President Barack Obama urged middle-class families who are in danger of seeing their taxes go up next year to begin using Twitter and other forms of communication to urge lawmakers to extend tax cuts for the middle class.

 

Obama said Wednesday they should use a new Twitter hashtag, #My2K, to explain what they would do with the additional $2,200 that a family of four is estimated to pay next year if the current tax rates expire for taxpayers earning less than $250,000 a year.

“Today, I’m asking Congress to listen to the people who sent us here to serve,” he said.  “I’m asking Americans all across the country to make your voice heard.  Tell members of Congress what a $2,000 tax hike would mean to you. Call your members of Congress, write them an email, post it on their Facebook walls.  You can tweet it using the hashtag My2K. Not Y2K. My2K. We figured that would make it a little easier to remember.”

Obama met with a group of small business owners Tuesday to discuss the impending tax hikes and other aspects of the so-called fiscal cliff that threatens to plunge the economy into recession next year unless Democrats and Republicans in Congress can agree on a tax cut extension and budget cuts (see Obama Meets Small Biz Leaders to Discuss Fiscal Cliff).

On Wednesday, Obama plans to sit down with the leaders of major financial firms such as Deloitte LLP CEO Joe Echevarria and Goldman Sachs chairman and CEO Lloyd Blankfein, as well as the chief executives of major corporations such as Yahoo CEO Marissa Meyer, Home Depot chairman and CEO Frank Blake, and Coca-Cola CEO Muhtar Kent.

“I’m sitting down with CEOs; I’m sitting down with labor leaders; I’m talking to leaders in Congress,” said Obama. “I am ready and able and willing and excited to go ahead and get this issue resolved in a bipartisan fashion so that American families, American businesses have some certainty going into next year. And we can do it in a balanced and fair way, but our first job is to make sure that taxes on middle-class families don’t go up. And since we all theoretically agree on that, we should go ahead and get that done. If we get that done, a lot of the other stuff is going to be a lot easier.”

Obama plans to go on a campaign-style trip later this week to Pennsylvania and other parts of the country to promote his tax policy. “Even the wealthiest Americans would still get a tax cut on the first $250,000 of their income,” he pointed out. “So it’s not like folks who make more than $250,000 aren’t getting a tax break, too. They’re getting a tax break on the first $250,000 just like everybody else.”

Speaker of the House John Boehner, R-Ohio, and Republican leaders met Wednesday with former Clinton White House Chief of Staff Erskine Bowles, who co-chaired the Simpson-Bowles deficit reduction commission, and the “Fix the Debt” coalition of business leaders to discuss a balanced framework for averting the fiscal cliff and solving our debt crisis.

“Going over the ‘fiscal cliff’ would hurt our economy and cost jobs, and people in both parties agree we need a ‘balanced approach’ to deal with our debt,” said Boehner in a statement after the meeting. “One thing Republicans won’t be party to is a deal that protects big businesses and preserves special-interest tax breaks while raising tax rates on the small businesses we’re counting on to create jobs. To show we’re serious about reaching a bipartisan agreement, we have offered to accept some new revenues, provided the revenue comes from tax reform and is accompanied by significant spending cuts. Without spending cuts and entitlement reform, it is impossible to address our country’s debt crisis. We put revenue on the table. Now, it’s important for President Obama and congressional Democrats to tell the American people what spending cuts they’re willing to make, and I’m hopeful the ‘Fix the Debt’ coalition will call on them to do so. Republicans are eager to forge a bipartisan agreement that can pass both chambers of Congress. The framework we’ve outlined is the responsible path, and it is consistent with the ‘balanced’ approach the White House says it wants.”

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Year-End Tax Planning For Individuals

Accelerating Income

In most years, taxpayers adopt a strategy of deferring income, but with the Bush-era tax cuts set to expire on December 31, 2012, income tax rates and capital gains taxes set to rise, and a 0.9 percent Hospital Insurance (HI) tax applicable to earnings of self-employed individuals or employee wages in excess of $200,000 ($250,000 if filing jointly) effective January 1, 2013, it might make more sense to accelerate income into 2012 instead of deferring it to 2013. Here are some of the ways you can do this:

  • Sell any investments on which you have a gain this year and take advantage of the zero percent long-term capital gains tax rate if you’re in the 10% or 15% tax bracket, or a 15% tax rate for higher tax brackets.
  • If you are expecting a bonus at year-end, try to get it before December 31. However, keep in mind that contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file a tax return for tax year 2013.
  • If your company grants stock options, you may want to exercise the option or sell stock acquired by exercise of an option this year if you think your tax bracket will be higher in 2013. Exercise of the option is often but not always a taxable event; sale of the stock is almost always a taxable event.
  • If you’re self employed, send invoices or bills to clients or customers this year in order to be paid in full by the end of December.

Caution: Keep an eye on the estimated tax requirements.

Accelerating Deductions

  • Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
  • Pay your entire property tax bill, including installments due in year 2013, by year-end. This does not apply to mortgage escrow accounts.
  • Try to bunch “threshold” expenses, such as medical expenses and miscellaneous itemized deductions. Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.

For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.

Tip: Now is the time to bunch deductible medical expenses. Medical expense deductions are 7.5% of AGI this year, but in 2013 increase to 10% of AGI.

In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2012, depending on your situation. The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.

Tip: Accelerating income into 2012 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year.

Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.

On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.

If you have any questions about estimated taxes, please call us.

Caution: The Alternative Minimum Tax (AMT) no longer just impacts the wealthy! Do not overlook the effect of any year-end planning moves on the AMT for 2012.

Due to tax changes in recent years, AMT impacts many more taxpayers than ever before and, the tax is not indexed to inflation. As a result, growing numbers of middle-income taxpayers have been finding themselves subject to this higher tax.

Items that may affect AMT include deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions.

Note: The AMT “Patch” expired in 2011. As such, AMT exemption amounts have reverted to 2000 levels. For example, the AMT exemption amount for married filing jointly is $45,000 in 2012, down from $74,450 in 2011.

Unless Congress takes action and enacts an AMT “patch” before year-end, AMT exemption amounts for 2012 are as follows:

  • $33,750 for single and head of household filers,
  • $45,000 for married people filing jointly and for qualifying widows or widowers,
  • $22,500 for married people filing separately.

Please call us if you’d like more information or if you’re not sure whether AMT applies to you. We’re happy to assist you.

Strategize tuition payments

The American Opportunity Tax Credit, which offsets higher education expenses, is set to expire after 2012. It may be beneficial to pay 2013 tuition in 2012 to take full advantage of this tax credit, up to $2,500, before it expires.

Residential Energy Tax Credits

The Residential Energy Efficient Property Credit is available to individual taxpayers to help pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and residential wind turbines. Qualifying equipment must have been installed on or in connection with your home located in the United States.

Geothermal pumps, solar energy systems, and residential wind turbines can be installed in both principal residences and second homes (existing homes and new construction), but not rentals. Fuel cell property qualifies only when it is installed in your principal residence (new construction or existing home). Rentals and second homes do not qualify.

The tax credit is 30% of the cost of the qualified property, with no cap on the amount of credit available, except for fuel cell property.

Generally, labor costs can be included when figuring the credit. Any unused portions of this credit can be carried forward. Not all energy-efficient improvements qualify so be sure you have the manufacturer’s tax credit certification statement, which can usually be found on the manufacturer’s website or with the product packaging.

What’s Included in the Tax Credit?

  • Geothermal Heat Pumps. Must meet the requirements of the ENERGY STAR program that are in effect at the time of the expenditure.
  • Small Residential Wind Turbines. Must have a nameplate capacity of no more than 100 kilowatts (kW).
  • Solar Water Heaters. At least half of the energy generated by the “qualifying property” must come from the sun. The system must be certified by the Solar Rating and Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed. The credit is not available for expenses for swimming pools or hot tubs. The water must be used in the dwelling. Photovoltaic systems must provide electricity for the residence, and must meet applicable fire and electrical code requirement.
  • Solar Panels (Photovoltaic Systems). Photovoltaic systems must provide electricity for the residence, and must meet applicable fire and electrical code requirement.
  • Fuel Cell (Residential Fuel Cell and Microturbine System.) Efficiency of at least 30% and must have a capacity of at least 0.5 kW.

While these residential energy credits don’t expire until 2016, why not take advantage of the credit this year and start saving money now? Give us a call today. We’re happy to help you sort out the tax credits available for your “green” home improvements.

Make Charitable Contributions

You can donate property as well as money to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses however.

Keep in mind that a written record of charitable contribution is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.

Tip: Contributions of appreciated property (i.e. stock) provide an additional benefit because you avoid paying capital gains on any profit.

Investment Gains And Losses

Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35% in 2012, but scheduled to rise to 39.6% in 2013) than long-term gains.

If your tax bracket is either 10% or 15% (married couples making less than $70,700 or single filers making less than $35,350), then now is the time to take advantage of the zero percent tax rate on qualified dividends and long-term capital gains. Even if you fall into a higher tax bracket, the maximum tax rate on long-term capital gains in 2012 is only 15%.

Consider where feasible to reduce all capital gains and generate short-term capital losses up to $3,000 as well.

Tip: As a general rule, if you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses up to the amount of your capital gains plus $3,000 per year ($1,500 if married filing separately) can be claimed as a deduction against income.

Tip: After selling securities investment to generate a capital loss, you can repurchase it after 30 days. If you buy it back within 30 days, the loss will be disallowed. Or you can immediately repurchase a similar (but not the same) investment, e.g., another mutual fund with the same objectives as the one you sold.

Tip: If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free, your original investment is restored and you have a higher cost basis for your new investment (i.e., any future gain will be lower).

Note: Starting in 2013, a 3.8 percent Medicare tax will be applied to investment income such as long-term capital gains. This information is something to think about as you plan your long term investments.

Please call us if you need assistance with any of your long term tax planning goals.

Mutual Fund Investments

Before investing in a mutual fund, ask whether a dividend is paid at the end of the year or whether a dividend will be paid early in the next year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay.

Example: You invest $20,000 in a mutual fund at the end of 2012. You opt for automatic reinvestment of dividends. In late December of 2012, the fund pays a $1,000 dividend on the shares you bought. The $1,000 is automatically reinvested.

Result: You must pay tax on the $1,000 dividend. You will have to take funds from another source to pay that tax because of the automatic reinvestment feature. The mutual fund’s long-term capital gains pass through to you as capital gains dividends taxed at long-term rates, however long or short your holding period.

The mutual fund’s distributions to you of dividends it receives generally qualify for the same tax relief as long-term capital gains. If the mutual fund passes through its short-term capital gains, these will be reported to you as “ordinary dividends” that don’t qualify for relief.

Depending on your financial circumstances, it may or may not be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date.

Tip: To find out a fund’s ex-dividend date, call the fund directly.

Call us if you’d like more information on how dividends paid out by mutual funds affect your taxes this year and next.

Year-End Giving To Reduce Your Potential Estate Tax

It may be time to reevaluate your estate plan. Unless Congress takes action before the end of the year, the federal gift and estate tax exemption, which is currently set at $5.12 million, drops to its pre-2010 level of $1 million ($2 million per couple) in 2013. In addition, the maximum estate tax rate is set to increase in 2013 from 35 percent to 55 percent.

Gift Tax. For many, sound estate planning begins with lifetime gifts to family members. In other words, gifts that reduce the donor’s assets subject to future estate tax. Such gifts are often made at year-end, during the holiday season, in ways that qualify for exemption from federal gift tax.

Gifts to a donee are exempt from the gift tax for amounts up to $13,000 a year per donee.

Caution: An unused annual exemption doesn’t carry over to later years. To make use of the exemption for 2012, you must make your gift by December 31.

Husband-wife joint gifts to any third person are exempt from gift tax for amounts up to $26,000 ($13,000 each). Though what’s given may come from either you or your spouse or from both of you, both of you must consent to such “split gifts”.

Gifts of “future interests”, assets that the donee can only enjoy at some future time such as certain gifts in trust, generally don’t qualify for exemption; however, gifts for the benefit of a minor child can be made to qualify.

Tip: If you’re considering adopting a plan of lifetime giving to reduce future estate tax, then don’t hesitate to call us. We can help you set it up.

Cash or publicly traded securities raise the fewest problems. You may choose to give property you expect to increase substantially in value later. Shifting future appreciation to your heirs keeps that value out of your estate. But this can trigger IRS questions about the gift’s true value when given.

You may choose to give property that has already appreciated. The idea here is that the donee, not you, will realize and pay income tax on future earnings, and built-in gain on sale.

Gift tax returns for 2012 are due the same date as your income tax return. Returns are required for gifts over $13,000 (including husband-wife split gifts totaling more than $13,000) and gifts of future interests. Though you are not required to file if your gifts do not exceed $13,000, you might consider filing anyway as a tactical move to block a future IRS challenge about gifts not “adequately disclosed”.

Tip: Call us if you’re considering making a gift of property whose value isn’t unquestionably less than $13,000.

Income earned on investments you give to children or other family members is generally taxed to them, not to you. In the case of dividends paid on stock given to your children, they may qualify for the reduced 5% dividend rate.

Caution: In 2012, investment income for a child (under age 18 at the end of the tax year or a full-time student under age 24) that is in excess of $1,900 is taxed at the parent’s tax rate.

Other Year-End Moves

Retirement Plan Contributions. Maximize your retirement plan contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. (It doesn’t need to actually be funded until you pay your taxes, but allowable contributions will be deductible on this year’s return.)

If you are an employee and your employer has a 401(k), contribute the maximum amount ($17,000 for 2012), plus an additional catch up contribution of $5,500 if age 50 or over, assuming the plan allows this much and income restrictions don’t apply).

If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $5,000 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch up contribution of $1,000 if age 50 or over.

Health Savings Accounts. Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and amounts you withdraw are tax-free when used to pay medical bills.

In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the excess over 7.5% of AGI). For amounts withdrawn at age 65 or later, and not used for medical bills, the HSA functions much like an IRA.

To be eligible, you must have a high-deductible health plan (HDHP), and only such insurance, subject to numerous exceptions, and must not be enrolled in Medicare. For 2012, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,200 ($1,250 in 2013) for single coverage or $2,400 ($2,500 in 2013) for a family.

Summary

These are just a few of the steps you might take. Please contact us for help in implementing these or other year-end planning strategies that might be suitable to your particular situation.

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White House Predicts Tax Hike Would Hit Consumer Spending

A new White House report from the President’s Council of Economic Advisers predicts that allowing tax rates for the middle class to rise and failing to patch the alternative minimum tax would have a negative impact on consumer spending and retailers alike.

The report, which was released Monday, forecasts that allowing the middle-class tax rates to rise and failing to patch the Alternative Minimum Tax could cut the growth of real consumer spending by 1.7 percentage points in 2013. “This sharp rise in middle-class taxes and the resulting decline in consumption could slow the growth of real GDP by 1.4 percentage points, which is consistent with recently published estimates from the Congressional Budget Office,” said the report.

Faced with these tax hikes, the report estimates that consumers could spend nearly $200 billion less than they otherwise would have in 2013 because of higher taxes. This reduction of $200 billion is approximately four times the total amount that 226 million shoppers spent on Black Friday weekend last year. The $200 billion reduction would probably be spread across all areas of consumer spending.

The report cites the example of a married couple with two children who have income between about $50,000 and $85,000, and estimates they would see a $2,200 tax increase. There would be a tax increase of $1,000 because the Child Tax Credit will fall from $1,000 to $500 per child, a tax increase of $890 because of merging the 10 percent tax bracket into the 15 percent tax bracket, and a tax increase of $310 because of the expiration of marriage penalty relief that provides a larger standard deduction for married couples.

President Obama and congressional Democrats have proposed to extend all the income tax cuts that benefit families who make less than $250,000 per year. The President has called on Congress to act now on extending all income tax cuts for 98 percent of American families and not to hold the middle-class and our economy hostage over a disagreement on tax cuts for households with incomes over $250,000 per year. The Senate has passed this bill and the President said he is ready to sign it.

“We should not hold the middle-class hostage while we debate tax cuts for the wealthy,” Obama said earlier this month. “We should at least do what we agree on, and that’s to keep middle-class taxes low. And I’ll bring everyone in to sign it right away so we can give folks some certainty before the holiday season.”

Congressional Republicans have so far resisted allowing tax rates to rise for both middle-class and upper-income taxpayers, although Democrats have insisted on the expiration of the Bush tax cuts for taxpayers earning over $250,000 a year. Negotiations are underway among staff members of both parties in Congress to decide what to do about the rising tax rates and the automatic spending cuts for both domestic and defense programs in order to avert a “fiscal cliff” that threatens to plunge the economy into recession next year.

A retail industry trade group expressed concern about the report. “Today’s report underscores enormous challenges that consumers and retailers will face if the White House and Congress are unable to work together to address these critical issues,” said Retail Industry Leaders Association president Sandy Kennedy in a statement. “The White House and Congress must work together to address the fiscal cliff, if they fail to do so, the strong opening to this year’s holiday shopping season will soon be a distant memory as consumers prepare for a massive tax increase.”

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2013 Standard Mileage Rates Up 1 Cent per Mile for Business, Medical and Moving

The Internal Revenue Service today issued the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 56.5 cents per mile for business miles driven
  • 24 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

The rate for business miles driven during 2013 increases 1 cent from the 2012 rate.  The medical and moving rate is also up 1 cent per mile from the 2012 rate.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.  In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51.  Notice 2012-72 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

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Retirement Contributions Limits Announced for 2013

The Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2013.

In general, many of the pension plan limitations will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged because the increase in the index did not meet the statutory thresholds that trigger their adjustment. Here are the highlights:

  • The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,000 to $17,500.

 

  • The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $5,500.

 

  • Contribution limits for SIMPLE retirement accounts increase from $11,500 to $12,000.

 

  • The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $59,000 and $69,000, up from $58,000 and $68,000 in 2012. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $95,000 to $115,000, up from $92,000 to $112,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $178,000 and $188,000, up from $173,000 and $183,000.

 

  • The AGI phase-out range for taxpayers making contributions to a Roth IRA is $178,000 to $188,000 for married couples filing jointly, up from $173,000 to $183,000 in 2012. For singles and heads of household, the income phase-out range is $112,000 to $127,000, up from $110,000 to $125,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

 

  • The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $59,000 for married couples filing jointly, up from $57,500 in 2012; $44,250 for heads of household, up from $43,125; and $29,500 for married individuals filing separately and for singles, up from $28,750.

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Splitting Tax Refunds May Lead to Fraud

The option of allowing taxpayers to split up their tax refunds into different accounts has increased the risk of fraud, perhaps even among IRS employees, according to a new government report.

 

The report, released Thursday by the Treasury Inspector General for Tax Administration, found that in calendar year 2011, more than 842,000 taxpayers took advantage of this “split refund” option, which the Internal Revenue Service first offered in 2007. Taxpayers are able to split their tax refunds between two to three different checking or savings accounts using Form 8888, Allocation of Refund (Including Savings Bond Purchases).

However, TIGTA found that more than 65,300 bank accounts had multiple direct deposits, accounting for more than 949,000 refunds for approximately $1.6 billion.

Auditors discovered that current IRS processes that are supposed to ensure the accuracy of direct deposit information are insufficient, increasing the potential of fraud. In addition, the option to split a refund between multiple accounts expands the risk of fraud.

“This is troubling,” said TIGTA Inspector General J. Russell George in a statement. “The IRS’s current practice of allowing direct deposits to be made to multiple accounts increases the potential for fraud and abuse.”

TIGTA identified more than 4,400 bank accounts listed on tax preparers’ personal tax returns that had multiple direct deposits. More than 202,000 refunds for more than $309 million were sent to these bank accounts. This raises a concern as to whether tax return preparers are diverting clients’ refunds or portions of refunds to their own bank accounts to pay tax preparation fees or for other reasons. TIGTA said the overall objective of its audit was to evaluate the IRS’s controls over the direct deposit of refunds.

TIGTA also identified more than 200 bank accounts listed on IRS employees’ tax returns that had multiple direct deposits. More than 10,600 refunds for more than $14 million were sent to these bank accounts.

TIGTA recommended that the IRS establish controls to identify tax preparers and IRS employees who potentially divert direct deposits to their own bank accounts. In response to the report, IRS officials agreed with the recommendation and plan to take appropriate corrective actions.

“With regard to the finding of accounts receiving multiple deposits from multiple taxpayers, it is important to note that the Treasury Inspector General for Tax Administration has not verified ownership of the bank accounts in question,” wrote Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division. “There are circumstances where multiple deposits to a single account are legitimate and acceptable. Thus, the IRS must initiate appropriate investigatory proceedings to ascertain ownership. Nonetheless, we agree with the TIGTA that the findings are indicative that additional controls are needed to identify and question these multiple deposits and the IRS is making changes in this area for the 2013 filing season. Still, caution must be exercised in drawing conclusions as to the extent of fraudulent activity present.”

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IRS Clashes with Inspector General over Security Cards

The Internal Revenue Service is taking issue with a new report from the Treasury Inspector General for Tax Administration that faults the IRS for taking longer than expected to upgrade its computer systems to allow the use of SmartID cards for improved security.

 

TIGTA noted in the report it publicly released Monday that the President’s Cyberspace Policy emphasized that agencies need to use SmartID cards to access computer systems. But the IRS has delayed its scheduled September 2011 implementation of the SmartID card authentication system to July 2013, the report noted.

“Upgrading the security of computer systems has never been more important to prevent disruptions in critical IRS processes and to protect taxpayers’ personal information from unauthorized access,” said TIGTA Inspector General J. Russell George in a statement. “The IRS is nearly two years behind its original planned completion date for implementing the new two-factor authentication system and enabling all employees to use SmartID cards for logical access. It is imperative that the IRS move swiftly and surely, doing everything in its power to secure its computer systems.”

The IRS, for its part, disagreed with some of TIGTA’s findings, arguing that the actions the agency has taken are sufficient.

At issue is the implementation and security of the IRS’s two-factor authentication system for accessing computer systems. TIGTA noted that two-factor authentication is a secure approach to verifying employees’ identities on a system and requires the presentation of two identifying factors: something the user knows (a personal identification number) and something the user has (a SmartID card). Two-factor authentication provides significant improvement in computer security in terms of allowing access to systems.

The IRS developed a two-factor authentication system with the required components. However, significant delays prevented the IRS from deploying the new two-factor authentication system as originally planned, TIGTA noted. The IRS originally planned to complete the deployment by September 2011. The deployment is now planned to be completed by July 2013.

In addition, the IRS did not appoint a project manager with the requisite training and experience to lead the Internal Identity and Access Management project, which included the two-factor authentication component. This decision led to numerous issues. The project team did not make adequate progress in some crucial areas, such as developing two-factor authentication for computer administrators, conducting required testing, and completing key documents and processes.

TIGTA reported that usage of the SmartID cards will be further delayed and recommended that the IRS’s chief technology officer direct IRS Labor Relations to notify the National Treasury Employees Union and begin negotiating mandatory use of the SmartID cards. TIGTA also recommended that the assistant chief information officer of cybersecurity at the IRS appoint a certified project manager with the requisite training and experience to lead the Internal Identity and Access Management project and direct the project manager to ensure the required security control assessment is completed, select a method to implement two-factor authentication for administrators, coordinate the activities to ensure all required testing is completed, and complete the required documents and processes that are needed to fully test and evaluate the system.

The IRS agreed with seven of the recommendations and plans to bargain with the National Treasury Employees Union as appropriate on mandatory use of the SmartID Cards, appoint a certified project manager and provide adequate resources to the project, and assign project resources to determine if a viable solution for administrators’ use of SmartID cards exists.

The IRS disagreed, however, with two recommendations regarding the completion of required testing of the new system and stated that testing was completed in accordance with its procedures and additional testing is not necessary.

“The IRS agrees with the general premise of the report that we have not made sufficient progress on implementation of Smart Cards for logical access,” wrote IRS chief technology officer Terence V. Milholland in response to the report. “However, the IRS disagrees with continuing further work related to testing and configuration audits of the Reduced Single Sign On (RSSO) implementation. Testing was completed as established by the Enterprise Life Cycle Project Management Office. In addition, the RSSO implementation is underway with the expected usage of 25,000 IRS users by the end of the year.”

TIGTA said in its report that it remains concerned about the IRS’s disagreement on the issue of testing. The IRS did not conduct the required testing for the most significant part of the two-factor authentication system, which is the part employees will use to authenticate to the IRS network. TIGTA found no evidence that the security, integration, capacity, and performance testing were conducted for this crucial part of the system.

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IRS Warns AMT Could Affect 60 Million Taxpayers Unless Patched

The head of the Internal Revenue Service told lawmakers that if Congress fails to extend the traditional patch for the Alternative Minimum Tax, approximately 60 million Americans could be affected and about 33 million taxpayers could pay the AMT for tax year 2012.

In a letter to the leaders of the tax-writing House Ways and Means Committee and the Senate Finance Committee, Acting Commissioner Steven T. Miller also warned that tax season could be delayed for up to a month next year if Congress does not act soon.

“A number of other tax provisions affecting individuals also expired at the end of 2011,” he wrote. “These include tax deductions for educators’ out-of-pocket classroom expenses, tuition and related fees for higher education, and state and local sales taxes. The last provision is of particular importance to taxpayers in states with no income tax.

“”These tax law changes are generally not as complex and do not present anything near the operational risk associated with the AMT patch,” Miller added. “Two years ago, Congress enacted legislation extending these provisions retroactively in mid-December 2010. As a result, the IRS made the necessary changes to its forms and systems, and delayed the opening of the 2011 filing season by four weeks for approximately 9 million affected taxpayers. If the IRS were presented with a similar scenario of late enactment of tax extenders legislation this year, I would anticipate a similar outcome. There would be some inconvenience and delayed refunds for a substantial number of taxpayers, but the overall risk to the tax filing season would be manageable.”

Congress has returned to session this week after the elections with taxes among the top items on its agenda. The so-called “fiscal cliff” is looming with the expiration of the Bush-era tax rates and dozens of other traditional “tax extenders” at the end of the year, along with the prospect of automatic cuts in both defense spending and discretionary spending unless Congress and the Obama administration can agree on a deficit reduction plan. The nation is also once again approaching its borrowing limit and Congress will soon need to agree to raise the debt ceiling.

Miller noted that the expiring tax provisions have added uncertainty for next tax season. “This year has been particularly challenging due to several unresolved tax issues,” he wrote. “When Congress takes action well after this planning process is underway, there is potential for substantial disruption to the filing season ahead. As Congress returns this week, I wanted to provide you with a detailed description of the effects on IRS operational planning if the current uncertainty regarding the AMT and extenders continues.”

Miller noted that the AMT applies to individual taxpayers with incomes above specific thresholds set by law, but for many years, Congress has been enacting “patches” to index these income thresholds for inflation in order to prevent millions of taxpayers from being subject to the AMT. The last such patch expired on Dec. 31, 2011.

“More specifically, for tax year 2011, the AMT exemption amount (as indexed for inflation) was $48,450 for individuals and $74,450 for married taxpayers filing jointly,” he explained. “Because of these thresholds, only about 4 million taxpayers paid AMT for tax year 2011. Under current law, however, the thresholds revert to much lower levels for 2012—$33,750 for individuals and $45,000 for married taxpayers filing jointly. At these levels, approximately 33 million taxpayers would pay AMT for tax year 2012 (with returns filed in the spring of 2013). This is about 28 million more taxpayers who would pay the AMT than if the exemption amounts were increased as in the past.”

Miller also pointed out that the AMT patch has historically been accompanied by a special tax credit ordering rule that applies to all taxpayers claiming certain tax credits, whether they owe the AMT or not. “The ordering rules change the order in which a number of popular tax credits are applied against tax liability, and how they may be used to offset both regular and alternative minimum tax,” he explained. “Taken together, the changes to the AMT exemption amount and the special tax credit ordering rules could affect more than 60 million taxpayers—nearly half of all individual income tax filers. In addition, the changes to the tax credit ordering rules that result from a lapse in the AMT patch are highly complex and cut deeply into the core tax processing logic of IRS’s critical filing season technology systems.”

In prior years—most recently in 2007 and 2010—Congress allowed the AMT patch to lapse for more than 11 months, but then retroactively reinstated it, Miller observed. “In both 2007 and 2010, the IRS consulted with Congress and was provided with bipartisan, bicameral assurances that Congress was working expeditiously to enact a patch. The IRS, in turn, made a risk-based decision to leave its systems programmed assuming that Congress would continue its historical practice and again enact extensions of both the increased AMT exemption amount and the special tax credit ordering rules.”

To stay consistent with past practice, Miller said he has instructed the IRS staff again this year to leave its core systems “as-is” with respect to the AMT, and hold off on the substantial design and engineering work that would be required in order to revert the core tax systems back to 1998 law, which will otherwise apply for 2012 in the absence of any action by Congress. “Therefore, if Congress enacts an AMT patch, including both increased exemption amounts and the special tax credit ordering rules, before the end of the 2012 calendar year, the IRS would likely be able to open the 2013 tax filing season with minimal delays for most taxpayers,” he said. “However, if there is no AMT patch enacted by the end of the year, the IRS would be forced to operate the 2013 tax filing season based on the expiration of the AMT patch. There would be serious repercussions for taxpayers.”

Without an AMT patch, Miller noted, about 28 million taxpayers would be faced with a very large, unexpected tax liability for the current tax year (2012). “In addition, in order to allow time for the IRS to make the programming changes necessary to conform our processing systems to reflect expiration of the AMT patch and the credit ordering rules, the IRS would, at minimum, need to instruct more than 60 million taxpayers that they may not file their tax returns or receive a refund until the IRS completes the necessary systems changes,” he added.” Because of the magnitude and complexity of the changes, it is entirely possible that these taxpayers would not be able to file until late March 2013, if not even later. Tens of millions of these taxpayers would unexpectedly have to pay additional income tax for 2012, leaving them with a balance due return or a much smaller refund than expected. For millions of other taxpayers, refunds would be delayed.

“Finally, because the AMT patch already expired at the end of 2011, there is no ability to consider partial year extensions of the AMT (since by the end of 2012 it would have already lapsed for an entire year),” he noted.

Lawmakers greeted the news with dismay. “Congress must act now to address our unfinished business and give middle-class families certainty by extending this expiring relief,” said Ways and Means ranking member Sander Levin, D-Mich., in a statement.  “Just as there is no reason not to extend the middle class tax cuts immediately, there is no reason Congress does not act on a bipartisan basis as it has in the past to fix the AMT. The consequences of inaction would be enormous for millions of middle class taxpayers. Extending AMT relief will prevent a substantial and unexpected tax increase on millions of Americans.”

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Read about year-end reminders for IRA owners

Whether you are still working or retired, you should periodically review your individual retirement accounts (IRAs). Here are a few things to remember.

Required Minimum Distributions (RMDs)

If you are age 70½ or older this year, you must take a 2012 RMD by December 31, 2012 (April 1, 2013, if you turned 70½ in 2012). You can calculate the amount of your IRA RMD by using the RMD worksheets. You must calculate the RMD separately for each IRA that you own other than any Roth IRAs, but you can withdraw the total amount from one or more of your non-Roth IRAs. Remember that you face a 50% excise tax on any amount of an RMD that you fail to take on time.

Contributions  Limits

If you’re still working, review the 2012 IRA contribution and deduction limits to make sure you are taking full advantage of the opportunity to save for your retirement. Remember you can make 2012 IRA contributions until April 15, 2013.

Excess Contributions

If you have exceeded the 2012 IRA contribution limit, you may withdraw excess contributions from your account by the due date of your tax return (including extensions). Otherwise, you must pay a 6% tax each year on the excess amounts left in your account.

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Charitable contributions may help lower your tax bill

If you made charitable contributions to a qualified organization, it may help lower your tax bill. Here are some tips to help ensure your contributions pay off on your tax return.

To get a tax deduction, you must give to a qualified organization. You cannot take a deduction for contributions made to specific individuals, political organizations or candidates; you must file Form 1040 and itemize the deduction on Schedule A.

A key thing to remember is, if you receive a benefit in connection with your contribution — such as dinner at a gala, merchandise, tickets to a ball game or other goods and services — then you can only deduct the amount that exceeds the fair market value of the benefit you received. For instance, if you make a contribution of $75 or more, the charitable organization should tell you the fair market value of any merchandise or other benefits you receive.

Stock or other non-cash donations are usually valued at the fair market value of the property. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations.

So, what do we mean by fair market value? This is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.

Another key thing to remember is regardless of the amount, to deduct a contribution of cash, check or other monetary gift, you must maintain:

  • a bank record,
  • payroll deduction records, or
  • a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.

 

 

If you, by chance, made a donation through a text message, a telephone bill will meet the recordkeeping requirement as long as it shows the name of the receiving organization, the date of the contribution and the amount given.

If you want to claim a deduction for contributions of cash or property equaling $250 or more, you must have:

  • a bank record,
  • payroll deduction records, or

 

  • a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.

 

One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.

If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return. Additionally, if you claim a deduction for a contribution of noncash property worth $5,000 or less, you must fill out Form 8283, Section A.

If you donate an item or a group of similar items valued at more than $5,000, you must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.

 

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