IRS Tips for Recently Married Taxpayers

The IRS just published its list of seven tax tips for recently married taxpayers.  I thought it would be good to review these tips as many of our clients have children who are getting married.

1. Report any name change to the Social Security Administration so that your name and Social Security number will match when you file your tax return, or else your tax return will be rejected.  This is the most common mistake.  File Form SS-5 at your local Social Security Administration office.  The form can be found at http://www.ssa.gov/online/ss-5.pdf
2. Notify the IRS of your new address by filing Form 8822.  This form can be found at http://www.irs.gov/pub/irs-pdf/f8822.pdf
3. Notify the U.S. Postal Service of your new address so that your mail can be forwarded.  Notification can be done online at https://moversguide.usps.com/icoa/icoa-main-flow.do?execution=e1s1
4. Notify your employer of any name and address changes so that your Form W-2 will be accurate.
5. Check your wage withholding amounts because each spouse's income will be combined on a joint tax return.  The IRS has a withholding calculator at http://www.irs.gov/individuals/article/0,,id=96196,00.html?portlet=4 which can be used to complete a new Form W-4 to be given to your employer.  The 2011 Form W-4 is available at http://www.irs.gov/pub/irs-pdf/fw4.pdf?portlet=3
6. Choose the correct income tax return form.  The simpler Forms 1040EZ or 1040A may no longer be appropriate, particularly if you will be able to itemize deductions for which the "long form" 1040 is needed.
7. Choose the best filing status.  Your marital status is determined as of December 31 and applies to the whole year.  Usually filing a joint tax return is best, but there are situations for which married filing separate tax returns is better.

Budget Super Committee Introduces Tax Uncertainties

The Budget Control Act of 2011 was signed into law on August 2, 2011, narrowly averting a possible default on repaying U.S. government obligations.  The Act raises the debt limit by $0.9 trillion plus an additional $1.2 to $1.5 trillion depending upon the actions of the super committee.  The Act reduces spending by $0.9 trillion over the next 10 years and creates a 12-member, bi-partisan joint "super" committee charged with making recommendations to cut an additional $1.5 trillion from the deficit over 10 years.  The committee may recommend any combination of spending cuts or tax increases.  If legislation is not enacted by January 15, 2012 to cut the deficit by at least $1.2 trillion, then any shortfall must be taken equally out of defense and social spending by January 1, 2013.  This latter provision is so distasteful to each political party that it is seen as the vehicle to force through an agreement from the super committee.

Super committee appointments are to be made by August 16, 2011 with the first meeting held no later than September 16, 2011.  The committee must vote on their conclusions no later than November 23, 2011.  If a majority votes in favor, then legislative language must be reported out no later then December 2, 2011.  Both the House and the Senate must vote on the proposal by December 23, 2011 with no amendments considered.  The committee may rely on previous proposals to reform spending and taxation due to the time constraint it must work under.  See prior postings dated May 24, 2011, December 6, 2010, and August 30, 2010 for a discussion of these proposals.

When Congress extended the Bush tax cuts at the end of 2010, it was thought that the tax rates could be counted on for at least two more years.  Now with the super committee, its proposals could have effective dates as early as November 2011 rather than January 2013!  It is hard to know what the actual tax proposals will be, if any.  There could be a loss of deductions in exchange for lower tax rates.  There could be an increase on just the so-called "wealthy."  The super committee structure creates uncertainties for taxpayers and businesses with respect to tax planning and budgeting.  In this very politicized environment, to paraphrase Former Speaker Nancy Pelosi when speaking of the health care reform bill, Congress will need to pass the law before we can find out what's in it!

Withholding by Government Entities

If your company sells goods or services to government entities, a new 3% withholding tax will apply beginning on payments received after 2012.  The withholding provision was originally enacted as part of the Tax Increase Prevention and Reconciliation Act of 2005, to be effective in 2011.  The American Recovery and Reinvestment Act of 2009 delayed the effective date to 2012.  Now the IRS has issued final regulations (T.D. 9524) on the matter, further delaying the effective date to 2013.  A additional delay until 2014 is available if your company has a binding contract that is entered into before December 31, 2012.  Certain exceptions are outlined in the regulations.  Legislation was introduced in January 2011 to repeal this withholding provision, but it has not been acted upon.

Government entities are broadly defined to include the federal and state governments, and also political subdivisions and instrumentalities, including public colleges, public universities, and public hospitals.

Withholding is not an additional tax.  It is similar to tax withholding on wages.  While the withholding will have an impact on your cash flow, you will be able to count the withholding as prepaid federal income tax when your tax return is filed for the 2013 tax year.  Changes will need to be made to your internal record keeping systems to identify and track amounts that will be withheld.

UPDATE
On November 21, 2011, the President signed P.L. 112-56 that repeals this 3% withholding law, making the law never in effect.  In its place, Congress enacted a 100% continuous tax levy against federal contractors who are delinquent on their federal taxes.

Taxpayer Identity Theft Rising

The Government Accountability Office recently reported that the IRS is dealing with a near five-fold increase in taxpayer identity theft, rising from 51,702 incidents in 2008 to 248,357 incidents in 2010. However only 4,700 cases were investigated by the IRS.

Thieves are taking taxpayer's tax identification information in order to steal tax refunds.  Thieves file for refunds early in the tax season before the legitimate taxpayer has time to gather records and file tax returns.  In addition, thieves take names and Social Security numbers to gain employment.  Later in the next year, the legitimate taxpayer receives a notice from the IRS that the taxpayer has not reported all of his or her income on the tax return.

If you receive a purported email from the IRS asking for personal information, do not respond, open any attachments, or click on any links.  Instead, forward the message to phishing@irs.gov and then delete the message.  The IRS does not need you to provide your personal identification information, they already have it!  Be careful to safeguard your information by shredding documents rather than just discarding documents containing your information.

If you have been a victim of tax identity theft, contact the IRS Identity Protection Specialized Unit at 800-908-4490.  If your wallet was lost or stolen, you can file Form 14039, Identity Theft Affidavit with the IRS and your account will be marked for review for future questionable activity.  Also consult the Federal Trade Commission's guidance for reporting identity theft at www.ftc.gov/idtheft.

June 30, 2011 Amendment for Cafeteria Plans

Cafeteria plan documents providing for medical flexible spending accounts must be amended by June 30, 2011 to limit the reimbursements to prescribed drugs or insulin.  The cost of over-the-counter drugs may not be reimbursed after 2010.  This change results from the Health Care Reform legislation enacted last year.  The amendment must be retroactive to January 1, 2011 and made by June 30, 2011 according to IRS Notice 2010-59.  The way around this restriction is to receive a prescription from your doctor for the over-the-counter medicine.

Note that the restriction also applies to Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs).  If a non-qualifying reimbursement is made by an HSA or an Archer MSA, the reimbursement will be included as taxable income and subject to a 20% tax penalty.

The restriction does not apply to items that are not medicines, such as crutches, bandages, diagnostic devices, etc.

FBAR Due June 30, 2011

U.S. persons having interests in foreign financial accounts must file an annual report with the U.S. government.  The 2010 Report of Foreign Bank and Financial Account (FBAR) must be received by the U.S. Treasury Department in Detroit, Michigan on or before June 30, 2011. The normal postmark rule for timely mailing of tax returns is not applicable. In addition, no extension of time permitted. Owners of entities that are required to file the FBAR must also file FBARs at the owner level if they have more than a 50% direct ownership interest. Significant penalties exist for late or non-filing.

The FBAR is an information return and is filed annually. The FBAR is required for all years in which the maximum bank account value (multiple accounts are aggregated for this purpose) exceeds US$10,000. A year-end exchange rate is used for conversion purposes.  In addition, any account earnings must be included in the U.S. income tax return.

The IRS currently has an amnesty program that provides an incentive for those who have failed to file the FBAR and/or to report the foreign account earnings on their income tax returns.  The program ends on August 31, 2011.  See my posting dated February 28, 2011 for more information.

Corporate Tax Reform Proposals

Various corporation income tax reform proposals have surfaced over the past six months.  At 35%, the U.S. has one of the highest top corporate income tax rates in the world.  However, a tangle of tax deductions, credits, and incentives enable many corporations to pay a much lower effective tax rate.  The impact of the corporate tax varies greatly by industry.  For example, large incentives currently exist for technology, manufacturing, and energy industries and also for multi-national companies.  In addition, income of C corporations is taxed twice:  once at the corporate level and again by shareholders when dividends are paid.

The proposals seek to lower the top rate to somewhere around 25%.  The proposals seek "revenue neutrality" by eliminating many deductions, credits, and incentives.  Thus industries and corporations benefiting the most under current tax law may have the most to lose in corporate tax reform.  Those industries and corporations that pay a higher effective tax rate could see their tax burden drop.  Corporate reform cannot be done in a vacuum.  If individual tax rates remain at 35% or higher, and the corporate rate drops to 25%, there could be a rush to reorganize business tax structures to benefit from the rate reduction.  Therefore, the drive for corporate tax reform could lead to overall fundamental tax reform.

Businesses operated as "pass-through" entities generally only have one-level of income tax which is paid by the owners of the entity.  As a result, there has been a large increase in the number of businesses operated as limited liability companies and S corporations.  The trend toward pass-through entities has caused a sharp drop-off in the amount of corporate income tax collected as a percentage of the gross domestic product (GDP).  According to a Congressional Research Service report, the percentage in the 1950's was around 5% of GDP.  In 2007 it was 2.7% of GDP.  And in 2010 the percentage was 1.3%, also reflecting the impact of the current financial recession.  As a result of this trend, one startling proposal is to tax pass-through entities with gross receipts of $50 million or more as C corporations.  If enacted, this change would have dramatic, adverse impact on many businesses and family organizations that have arranged their affairs to reduce their tax burdens in accordance with current tax law.