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Late on January 1, 2013, Congress passed HR 8 (Tax Relief Extension Act) which extended almost all of the Federal tax provisions that had expired at the end of 2011 and 2012.
Although the Tax Relief Extension Act contains many individual, business, and energy tax provisions that were extended or modified, the following are the ones that will have the most impact on taxpayers filing their 2012 Federal returns this coming filing season.
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) provisions were permanently extended as follows:
Individual and Business Provisions
The following individual and business provisions were extended and will apply to Tax Years 2012 and 2013:
Section 179 Expense
The following Section 179 provisions were extended and will apply to tax years 2012 and 2013:
Adoption Credit
The portions of the Adoption credit that made it a refundable credit and increased the credit amount were not extended. Thus the adoption credit reverts back to being a nonrefundable credit with any excess being allowed to be carried forward for five years. The maximum credit for 2012 will be $12, 650.
Federal Provisions That Were Not Extended
The following Federal provisions were not extended and thus are not applicable for 2012 Federal returns:
Availability of Form 1040 Instructions and Publication 17
Due to the lateness of the passage of this tax bill and the uncertainty surrounding the above extender provisions the IRS has not yet released the Form 1040 instructions or Publication 17. Now that it has passed, the IRS should be releasing them in the near future.
t is important to set your customers’ expectations for when the IRS will be sending refunds during the upcoming 2013 Filing Season and beyond.
Due to the increase in fraud and identity theft, the IRS is increasing their fraud filters during the processing of all individual returns. This means that a larger number of returns will be reviewed therefore, processing will take longer and the refund will be sent out later for these returns.
The IRS messaging for refunds for the upcoming filing season will be that refunds will be sent to the taxpayer within 21 days from the time the return has been accepted. This message will be the same on the IRS website, “Where’s My Refund?” page, and when a taxpayer calls the IRS help desk.
The refund cycle chart has been eliminated and replaced with an IRS Information Guidelines for the Tax Preparation Community publication.
You will also notice the following changes to the “Where’s My Refund?” tool for the upcoming filing season:
The IRS has also begun sending out an additional message to taxpayers that they should not be making major purchases during the holiday season solely on the expectation of when they will receive their refund before the bills arrive.
Lastly, the IRS is reminding preparers that they must follow the advertising standards in Publication 3112 (IRS E-File Application and Participation) andPublication 1345 (Handbook for Authorized E-file Providers of Individual Income Tax Returns) regarding faster refunds.
There is a lot to cover; we will begin with tax practice updates that are not related to late legislation, then move on to the Fiscal Cliff Legislation Tax Changes.
The 2013 electronic filing season begins on Tuesday, January 22, 2013
The “Refund Cycle Chart” will not exist for Tax Season 2013. The IRS has enhanced the “Where’s My Refund” application on www.irs.gov. The IRS issued more than 9 out of 10 refunds to taxpayers in less than 21 days last year. The same results are expected in 2013. The IRS replaced the “Refund Cycle Chart” with Publication 2043. Please print a copy of this publication and make sure all of your preparers understand the how to use this handy tool.
Due to the significant increase in the filing of fraudulent returns and identity theft, the IRS will be increasing their fraud filters for the upcoming filing season. This means more returns will be selected for further review and could result in a delay in the processing of these returns.
In an effort to strengthen the refund process the IRS has made changes to the following forms:
Schedule 8812 (Child Tax Credit). The new Schedule 8812 was formerly Form 8812 (Additional Child Tax Credit). The schedule is used to claim the additional child tax credit and is now used to answer a question regarding the substantial presence test for those children that have an ITIN for whom the taxpayer is claiming a child tax credit on their 2012 Federal tax return.
Form 8863 (Education Credits). For each persona claiming either the American Opportunity or Lifetime Learning Credit, the following additional information must now be included on the 2012 Form 8863, Part III:
Name and address of the educational institution the student attended
Additional questions regarding Form 1098-T
Additional questions on the eligibility of the student for an education credit for the current year. We recommend that every preparer review the revised Form 8863
Schedule 8867 (Paid Preparer’s Earned Income Credit Checklist). In the IRS’s continuing effort to ensure the preparer is following due diligence in preparing EITC returns, a new page 4 has been added to Form 8867. This page has additional questions related to the preparer’s due diligence requirements concerning documentation that the preparer relied on to claim the earned income tax credit for Tax Year 2012, e.g.
Residency of Qualifying Child(ren)
Disability of Qualifying Child(ren)
Schedule C income and existence of business
Form W-7 ITIN Application. Interim procedures were initiated by the IRS on June 22, 2012 and remained in force until December 31, 2012. New procedures have been implemented to strengthen the ITIN program and maintain the integrity of the refund process. Some of these changes include:
Only original documents may accompany the Form W-7
ITIN applicants must have a tax related purpose for applying for an ITIN
1040 returns filed with W-7 will be subject to extra scrutiny
Certifying Acceptance Agents. The IRS understands there must be alternative options for those applying for an ITIN and cannot send their original passports to the IRS for any length of time. The IRS has added additional requirements to those wishing to become Certifying Acceptance Agents:
All CAAs must complete a forensic document training course by January 31, 2012
Proof of completion of forensic document training must be sent to the IRS by February 28, 2013
All CAAs must purchase tools and publications to stay current with the new regulations.
Visit www.irs.gov/ITIN to review these new procedures
Identity Protection PIN for the Upcoming 2013 Filing Season. The IRS is expanding the number of taxpayers who will receive an Identity Protection Pin (IP PIN) for the upcoming season. All taxpayers that have had an identity theft indicator applied to their IRS tax account will receive an IP PIN that must be included on their 2012 Federal income tax return. This means that approximately 600, 000 taxpayers will receive an IP PIN for the upcoming filing season.
Notice CP01A is the notice the affected taxpayers will receive their IP PIN from the IRS in December of 2012. This notice will include their 6-digit IP PIN and information on the use of the IP PIN.
Fiscal Cliff Legislation Tax Changes
Payroll Alert! All wage earners will see a 2% increase in January 2013 in their Social Security tax, as Congress did not opt to extend that payroll tax holiday.
Personal Tax Credits. The $1, 000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017.
Permanent extensions.
Child and dependent care credit rules based on up to $3, 000 of expenses for one dependent or up to $6, 000 for more than one
The exclusion for employer-provided educational assistance
The enhanced rules for student loan deductions
The employer-provided child care credit
The higher contribution amount and other EGTRRA changes to Coverdell education savings accounts
Special treatment of tax-exempt bonds for education facilities
Repeal of the collapsible corporation rules
Other personal deductions and exclusions. The following deductions and exclusions are extended through 2013:
Discharge of qualified principal residence exclusion
$250 above-the-line teacher deduction
Mortgage insurance premiums treated as residence interest
Deduction for state and local taxes
Above-the-line deduction for tuition
IRA-to-charity exclusion
Other Key elements of the deal:
Permanently sets Alternative Minimum Tax (AMT) exemption at $50, 600 (single) and $78, 750 (joint filers) for 2012 and adjusts for inflation thereafter
The itemized deduction phase-out is reinstated, and personal exemption phase-out will be reinstated, but with different AGI starting thresholds (adjusted for inflation): $300, 000 for married filing joint, $275, 000 for head of household, and $250, 000 for single.
Capital gains tax and dividends tax will be 20% for taxpayers with income over $400, 000 (single) and $450, 000 (joint filers). This does not include the new 3.8% health care tax on investment income above $200, 000 (single) and $250, 000 (joint filers) in adjusted gross income, so the top rate for capital gains and
dividends will be 23.8%. For lower income levels, the tax will be 0%, 15% or 18.8%.
Continues with the standard deduction for joint filers at 2X single filers (would have otherwise reverted to 1.67X single filers)
Retained the 10%, 15%, 25%, and 28% income tax brackets from the Bush tax cuts permanently.
Retains the 33% and 35% income tax brackets from the Bush tax cuts for taxable income under $400, 000.
A top rate of 39.6% (up from 35%) will be imposed on individuals making more than $400, 000 a year, $425, 000 for head of household, and $450, 000 for married filing joint.
15-year depreciation and IRC 179 expensing allowed on qualified real property through 2013
Work Opportunity Credit extended through 2013
Bonus depreciation extended through 2013
The IRC 179 deduction limitation is $500, 000 for 2012 and 2013
The estate tax will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40% rate (up from 35% in 2012.
New Taxes
Additional hospital insurance on high-income taxpayers. The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed $250, 000 of a joint return, $125, 000 of MFS, and $200, 000 in any other case.
For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of tax on SE income in excess of the threshold amount.
The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013-2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI
Effective for cafeteria plan years beginning after December 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2, 500