Did You Overlook Something on a Prior Tax Return?
Occasionally, clients will realize that an item of income was overlooked, a deduction was not claimed, or that an amended tax document was received after the tax return was already filed. Regardless of whether the oversight will result in more tax due or a refund, it should not be dismissed. Failing to report an item of income will most certainly generate an IRS inquiry, which typically happens a year after the original return was filed and after the interest and penalties have built up. On the other hand, if you have a refund coming, you certainly don’t want that to go by the wayside.
The solution is to file an amended return as soon as the error or omission is discovered. Amended returns can also be used to claim an overlooked credit, correct the filing status or the number of dependents, report an omitted investment transaction, submit delayed K-1s, or anything else that should have been reported on the original return.
If the overlooked item will result in a tax increase, penalties and interest can be mitigated by filing an amended return as soon as possible. Procrastination leads to further complication once the IRS determines something is missing, so it is best to take care of the issues right away.
Generally, to claim a refund, an amended return must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later.
If any of the above applies to your situation, please give this office a call so we can prepare an amended tax return for you.
President’s Proposed Tax Changes for 2014
The budget proposal released by President Obama on April 10 includes a substantial number of proposed tax changes impacting individuals, businesses, estate taxation, energy incentives, and international issues. Although these are only proposals, they provide an insight into the administration’s thinking on tax reform. An overview of the most prominent issues related to individuals and small business is provided below.
Individual Proposals
1.Reduce the value of itemized deductions and other tax preferences to 28% for families with income in the three highest tax brackets. This limit would apply to all itemized deductions; foreign excluded income; tax-exempt interest; employer-sponsored health insurance; retirement contributions; and selected above-the-line deductions.
2.Observe the “Buffett rule” by requiring millionaires to pay no less than 30% of income (after charitable contributions)in taxes. This would be referred to as the “fair share tax.”
3. For tax years beginning after Dec. 31, 2017, permanently extend the American Opportunity Tax Credit(AOTC), a partially refundable tax credit worth up to $10,000 per student over the course of four years of college.
4. For tax years beginning after Dec. 31, 2017, permanently extend the increased refund ability of the child tax credit (CTC) by permanently reducing the earned income threshold to$3,000.
5.Extend the exclusion from income for the cancellation of certain home mortgage debts to amounts that are discharged before Jan. 1, 2016 and amounts that are discharged pursuant to an agreement entered into before that date.
For tax years beginning after Dec. 31, 2017, make permanent the expansion of the EITC for workers with three or more qualifying children by maintaining (i) at 45%, the phase-in rate of the EITC for workers with three or more qualifying children, and (ii) the phase-out range for married couples at $5,000 higher than those for unmarried filers (indexed after 2009).
Increase the child and dependent care credit available to working families with incomes between$15,000 and $103,000.
8. Extend the exclusion for income from the discharge of qualified principal residence indebtedness (QRPI) to amounts that are discharged before Jan. 1, 2015, and to amounts that are discharged pursuant to an agreement entered into before that date.
9. Prohibit individuals from accumulating over $3 million in tax-preferred retirement accounts.
Business Proposals
Make permanent the $500,000 Sec. 179 deduction with a $2 million phase-out threshold.
Enhance and make permanent the research credit and increase the simplified credit percentage to 14%.
Permanently extend the work opportunity tax credit (WOTC) to wages paid to qualified individuals who begin work after Dec. 31, 2013.
Offer a one-time, temporary, 10% tax credit for increases in company wage payments over wages paid in 2012, whether driven by new hires, increased wages or salaries, or both.
Require employers who have over 10 employees and do not currently offer a retirement plan to enroll their employees in a direct-deposit Individual Retirement Account (IRA) that is compatible with existing direct-deposit payroll systems. (Employees can opt out if they choose.) Employers would be entitled to a tax credit of $25 per participating employee, up to $250 per year, for six years.
Deny deductions for punitive damages.
Make the 100% exclusion permanent for qualified small business stock (QSBS) acquired after Dec. 31, 2013.
Permanently double the maximum amount of start-up expenditures that a taxpayer may deduct (in addition to amortized amounts) in the tax year in which a trade or business begins from $5,000 to $10,000 for tax years ending on or after the date of enactment. Reduce this maximum amount of start-up expenditures (but not to below zero) by the amount that start-up expenditures with respect to the active trade or business exceed $60,000.
For tax years beginning after Dec. 31,2012, expand the group of employers who are eligible for the tax credit available to small employers providing health insurance to employees so as to include employers with up to 50 full-time (or the equivalent) employees, and begin the phase-out at of the restriction to no more than 20 full-time equivalent employees.
Create a new general business credit against income tax equal to 20% of the eligible expenses paid or incurred in connection with insourcing a U.S. trade or business.
Disallow deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business.
Estate and Gift Tax Proposals
Beginning in 2018, return to 2009 levels the estate, generation-skipping transfer (GST), and gift tax exemptions and rates. Thus, the highest tax rate would be 45%, and the exclusion amount would be $3.5 million for estate and GST taxes and $1 million for gift taxes.
Require that the basis of property in the hands of the recipient be no greater than the value of that property as determined for estate or gift tax purposes (subject to subsequent adjustments). These rules would apply to transfers on or after the enactment date.
Keep in mind that these are only proposed changes, and they must be passed by both houses of Congress in order to become law.
Tax Rate increases for 2013
As part of the 2012 American Taxpayer Relief Act(ATRA), tax rates, both ordinary and capital gains, increased in 2013 for higher income taxpayers whose taxable income exceeds the income threshold for their filing status.
The thresholds at which taxpayers are subject to the top ordinary and long-term capital gains tax rates are $450,000 for joint filers and surviving spouses,$425,000 for heads of household, $400,000 for single filers, and $225,000 for married couples filing separately.
These increases will have the following impact on ordinary income and long-term capital gains rates:
· Ordinary Income Rates- Prior to the law change, there were six tax brackets: 10, 15, 25, 28, 33 and 35%. The ATRA added a new top rate of 39.6%. Thus, higher-income taxpayers, to the extent their taxable income exceeds the income threshold for their filing status, will be subject to the new 39.6% rate (up 4.6% from previous 35% top rate).
Example: Jack and Sally, who are filing jointly, have an ordinary taxable income of $600,000. Their income above $450,000 will be subject to the 39.6% tax rate. Thus, they will see a tax increase of$6,900 $450,000) x 4.6%) as a result of the new tax bracket.-(($600,000
· Capital Gains and Dividends - Prior to the law change, the long-term capital gain was zero for taxpayers in the 10 and 15% ordinary income tax bracket and 15% for taxpayers with taxable income above the 15% bracket. The ATRA increased the top rate for long-term capital gains and qualified dividends to 20% (up from 15%)for taxpayers with incomes exceeding the threshold for their filing status. Thus, for years beginning in 2013, there will be three long-term capital gains rates: 0, 15, and 20%, with the 20% applying to higher-income taxpayers.
Example: Howard, a single individual, retired this year and sold his rental property, which he had owned for a long time, for a profit of $700,000. Even though his income is generally in a lower-income tax bracket, the profit from the sale itself pushed his income above the $400,000 threshold for single taxpayers, and to the extent his income exceeds the $400,000 threshold, he will be subject to the increased capital gains rate. Had Howard’s other taxable income been $50,000, he would have had a total income of $750,000, of which $350,000 exceeds the 20% long-term CG rate threshold. As a result, Howard pays the 20% rate on $350,000, resulting in an increase of$17,500 ($350,000 x 5%) over what he would have paid in 2012.
Generally, sales that are subject to long-term capital gains rates are also investment income subject to the 3.8% unearned income Medicare contribution tax that is part of the Affordable Care Act.
If Howard had utilized an installment sale, he could have spread the gain over multiple years and possibly avoided the higher CG rate. He might have alsoutilized a tax-deferred exchange to defer the gain into another real estate property.
If you have any questions about how these new tax rates will impact you, please give this office a call
Franklin Katz, ATP, PA, PB
Frank's Tax & Business Service
315 E. King St.
Kings Mountain, NC28086
704-739-4039
E-Mail: [email protected])
Web: www.prep.1040.com/frankstax
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