McKonomics

When Should You Keep and Throw Out Tax Documents?

Once your 2010 tax return has been put to bed, you can rest easy until it's time to prepare for filing next year...right? Wrong. Before you turn out the lights, collect all the vital materials from your 2010 return and store them in a safe place. The documents you don't need anymore can be thrown away, after shredding them or destroying them, of course.

In many cases, tax returns are now filed electronically, so that cuts down on the mound of paperwork you've faced in the past. But you still have to keep certain records for a minimum period of time. We're not a "paperless society" quite yet. Also, you must also cope with recordkeeping burdens for the 2011 tax year.

What sort of records are we talking about? It depends on your particular situation, but here are several common areas where record retention is a must. Otherwise, you can run any extraneous papers through the shredder.

Securities: Normally, you're advised to keep records of trading activities and 1099 forms for securities, especially as they relate to the "basis" of these investments.

Two Sets of Burdensome 1099 Rules are Repealed

President Obama has signed a law that repeals two sets of rules that had business owners, company managers and landlords up in arms because of the paperwork nightmare they created. The rules that involved businesses issuing a blizzard of 1099 forms were created by two laws enacted in 2010. Rental property owners had to begin complying with one of the sets of rules this year. The second set for other types of businesses was not scheduled to go into effect until next year. 

The new rules ignited an immediate firestorm of criticism, but repealing them took longer than some expected. 

Thankfully, all the attempted 1099 rule changes have finally been quashed by the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act, which was signed into law on April 14, 2011. 

Not Ready to File Your Taxes?

If you need more time to get your tax information together, don't panic. You can get six additional months to finalize your return by filing Form 4868, Application for Automatic Extension of Time to File by the April 18th tax deadline. Remember, this is an extension to file your return, not to pay your taxes. Getting an extension to file allows you to avoid being hit with a failure-to-file penalty. 

To complete Form 4868 you will need to estimate your tax liability and pay the amount you owe by check, debit card or credit card. 

If your state has an income tax, you will also need to check with your state tax authority to find out how to extend your state return.   

What if you Can't Pay the Tax You Owe? The IRS recognizes that in extreme circumstances, some taxpayers may be unable to pay the full amount of taxes owed by the April 18th deadline. Consult with your tax adviser if you have questions about your situation. 

Here are some possible options. 

• Entering into an installment agreement. Taxpayers owing less than $25,000 in tax, penalties and interest, may be able to enter an installment agreement with the IRS.
• Using a credit card or debit card. The IRS accepts most credit and debit cards.
• Borrowing the money.
• Request additional time to pay. Taxpayers may be able to get an extended time to pay their tax bills in full (60 to 120 days) due to undue hardship. This will generally result in paying less in penalties and interest than paying through an installment agreement.

New IRS Guidance on Reporting of Employer Health Coverage

The IRS issued interim guidance to employers on the informational reporting on each employee's annual Form W-2 that lists the cost of the health insurance coverage they sponsor.  

The IRS emphasized that this new reporting to employees is for their information only, to inform them of the cost of their health coverage. It does not cause excludable employer-provided health coverage to become taxable. Employer-provided health coverage continues to be excludable from an employee's income, and is not taxable. 

The new requirements to provide employees with this information on W-2 Forms stems from the Patient Protection and Affordable Care Act, which was enacted just over a year ago. The interim guidance is generally applicable beginning with 2012 W-2 forms, which would be issued to employees by January 2013. 

Exception to the general rule for smaller employers: Employers that issue less than 250 W-2 Forms in 2011 will not be required to comply before January 2014. 

However, all employers can chose to rely on the guidance for 2011 W-2 Forms, even though it is not required. 

Under the new requirements, an employer must provide written information on W-2 Forms to employees showing them the remuneration paid during the calendar year. This must be done on or before January 31 of the following year (there are different rules if an employee terminates employment during the year.) 

IRS Throws a Lifeline to Struggling Taxpayers - New Help for Taxpayers Who Fall Behind

The IRS recently unveiled a new program to help struggling individual taxpayers and small business owners pay off tax debts and avoid tax liens. 

The new program is the latest in a series of efforts designed to assist taxpayers who can't pay. In 2008, the IRS provided lien relief for individuals trying to refinance or sell their homes. A year later, the tax agency created more flexibility for taxpayers facing payment problems. 

Here's a brief summary of the new five-step program. 

Step #1: Increase the dollar threshold for issuing tax liens.  

The new rules generally prohibit the IRS from filing a lien unless unpaid taxes exceed $10,000. This doubles the previous limit of $5,000, which had been in effect since the mid-1980s. The IRS plans to review the results and the impact of this change in about a year. 

IRS Announces New Effort to Help Struggling Taxpayers Get a Fresh Start

In its latest effort to help struggling taxpayers, the Internal Revenue Service announced a series of new steps to help people get a fresh start with their tax liabilities.

The goal is to help individuals and small businesses meet their tax obligations, without adding unnecessary burden to taxpayers. Specifically, the IRS is announcing new policies and programs to help taxpayers pay back taxes and avoid tax liens.

"We are making fundamental changes to our lien system and other collection tools that will help taxpayers and give them a fresh start," IRS Commissioner Doug Shulman said. "These steps are good for people facing tough times, and they reflect a responsible approach for the tax system."

This effort centers on the IRS making important changes to its lien filing practices that will lessen the negative impact on taxpayers. The changes include:

Pennsylvania Bonus Depreciation Issue - Big Change for Business

The federal government has provided for the acceleration of depreciation expense on qualified assets for various periods of time since 2001. The main purpose for providing the acceleration of depreciation was to encourage businesses to make investments in their company in an effort to stimulate the economy.

The initial bonus depreciation deduction provided for a 30% deduction to income of eligible assets purchased between September 10, 2001 and September 10, 2004. The bonus depreciation amount was increased from 30% to 50% for assets purchased between May 5, 2003 and January 1, 2005. The second provision of bonus depreciation provided for a 50% deduction to taxable income for assets placed in service after December 31, 2007 and before January 1, 2011. In both instances, the depreciation deduction can be taken on the remaining 50% of the assets value over the useful life of the asset. Finally, the Tax Relief Act of 2010 expanded bonus depreciation to allow for a 100% deduction of qualified assets purchased from September 8, 2010 through December 31, 2011. The 100% bonus depreciation preempts the previous 50% depreciation for assets placed in service from September 8, 2010 through December 31, 2010 as previously provided. 

New Law Extends IRA Donation Tax Break: Can You Benefit?

There's good news if you've reached age 70 1/2, and you have an IRA and philanthropic inclinations. Through 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 resurrected the opportunity to make cash donations to IRS-approved charities directly out of your IRA.

Such qualified charitable distributions are federal-income-tax-free, but you get no itemized charitable deduction on Form 1040. But that's okay. The tax-free treatment of qualified charitable distributions equates to an immediate 100 percent deduction, since the otherwise-taxable IRA dollars are sent directly to charity.

Here is a detailed explanation of the qualified charitable distribution privilege, which was extended in the latest tax law.

Take Advantage of Business Credits Even if You Didn’t Have Taxable Income in 2010

The general business credit is composed of several different credits which can be used to offset the tax liability imposed on a taxpayer in any given year. Some of the many credits that a taxpayer may take advantage of are: the credit for increasing research activities, low-income housing credit, renewable electricity production credit, biodiesel and renewable diesel fuels credit, and the new hire retention credit. 

Typically, the general business credit is only allowed to offset the income tax liability for a particular tax year, and is subject to an annual limitation based on tax liabilities. Plus, only certain specified credits are allowed to offset part or all of the alternative minimum tax (AMT). Unused general business credits may generally be carried back one year and forward for twenty years. 

New Law Includes Fresh Batch of Favorable Depreciation Changes

 The new Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act includes important depreciation changes for 2011 and 2012 that will benefit both small and large businesses. Even better, the best change is retroactive to the last part of 2010. The depreciation changes made by the new law are layered on top of changes made by last September's Small Business Jobs Act. 

Here is how your business can benefit from the two laws. 

Bonus Depreciation Liberalized and Extended 

The Small Business Jobs Act allows 50 percent first-year bonus depreciation for qualifying new (not used) assets placed in service in calendar year 2010. (Used assets do not qualify.) The new law takes bonus depreciation to a higher level for the last part of 2010 and all of 2011. It also allows 50 percent bonus depreciation for 2012.