While it may seem a bit early, spring time will be here soon and with it, tax season. This reporter heard about the American Taxpayer Relief Act of 2012 and was curious to learn more about it.
Susana Veamatahau Pau, the Franchise Manager and senior tax Preparer, for Jackson Hewitt Tax Service graciously responded. I presented her with seven questions that I figured most people would like to know. Pau manages the San Francisco and San Mateo County region.
1) What is the American Taxpayer Relief Act of 2012? What does it do for the average American tax payer?
"Recently approved by Congress, the American Taxpayer Relief Act of 2012 is a bill that retroactively extends many expired tax benefits for 2012," said Pau. "It permanently patches the AMT, and makes permanent most of the provisions of the Bush Tax Cuts that had technically expired on January 1, 2013."
Pau pointed out that, through the legislation, most taxpayers can now breathe a sigh of relief in having avoiding significant tax increases that would have come from the country falling off the ‘Fiscal Cliff’ had a deal not been reached.
There are many elements included in the bill, said Pau.But here are three taxpayers should note:
• The Payroll Tax Holiday: The resolution to the fiscal cliff extended a lot of taxpayer friendly benefits into the 2012 tax year, but the Payroll Tax Holiday was not one of them, and Congress decided to let it expire January 1, 2013. This tax benefit lowered the taxpayer required Social Security tax payment by 2 percent in 2011 and 2012. With the expiration of the benefit, taxpayers’ payroll taxes increased on January 1 by 2 percent, which lowers total take-home pay.
• The Alternative Minimum Tax: The Alternative Minimum Tax, commonly referred to as the AMT, was enacted in the 1969 to ensure that individuals and corporations that benefit from certain exclusions, deductions, or credits pay at least a minimum amount of tax. The minimum income required to be subject to the tax is what was permanently ‘patched’ this year. The change protects more than 31 million taxpayers from an increase of almost $3,000 in taxes.
• Other deductions impacted by the American Taxpayer Relief Act of 2012: While the Payroll Tax Holiday was left to expire, other deductions were extended, such as the current versions of the student loan interest deduction and the credit for child care, both of which were permanently extended. Additionally, the American Opportunity credit was extended through 2017.
2) Are there any limitations or restrictions to the benefits that retroactively extends many expired tax benefits for 2012 and many of the provisions of the Bush Tax Cuts that expired on January 1, 2013?
Jackson Hewitt Tax Service
Susana Veamatahau Pau is a senior tax preparer and franchise manager for the San Francisco and San Mateo County region for Jackson Hewitt Tax Service
The 2012 tax law changes were extended for two years only for January 1, 2012 through December 31, 2013, said Pau.
"The Mortgage Debt Forgiveness was extended through December 31, 2013," she said.
The American Opportunity Credit, the expanded Additional Child Tax Credit, and the Expanded EITC rules covering married taxpayers and families with three or more children have been extended through December 31, 2017.
3) You say that it is best to Look for a local tax preparer who is knowledgeable and who has a Preparer Tax Identification Number (PTIN), which the IRS requires for all paid tax preparers. Is this an indication that tax preparation and forms are now all electronic and that this way is the way for the 21st Century? I also asked another question. For those people who are not tech savvy, will hard copy forms submitted still suffice? Or is that completely phased out now?
"The Internal Revenue Service now requires all paid preparers to have a Preparer Tax Identification Number (PTIN) before preparing returns," said Pau.
This requirement is part of the IRS initiative to set minimum standards for practice and knowledge for all preparers, whether a customer’s return is submitted electronically or on paper.
While it is still possible to submit a paper return via U.S. mail to the IRS, most taxpayers prefer to electronically submit their tax documents. In fact, more than 113 million income tax returns were e-filed last year (in 2012), or more than 80 percent of all individual returns filed. In addition, the IRS requires all tax return preparers who complete tax returns for more than 10 people to e-file returns. Taxpayers who wish to file a paper return may still do so, even when they use a tax professional.
E-file, or electronic filing, is a method of sending your tax return to the IRS and the state via a secure computer-to-computer channel. There are several benefits to e-filing a tax return:
1. Speed: The processing time is faster. The IRS expects 9 out of 10 taxpayers will receive their refund in under 21 days after the IRS receives the return again this year.
2. Accuracy: Before your return is accepted by the IRS, math errors as well as name and social security numbers are verified. Plus, paper returns are entered by IRS employees, thereby leading to potential mistakes and inaccurate entries.
3.Confirmation the IRS has received your return: The IRS responds electronically once your return is accepted as filed.
4) Is it good for everyone to keep track of all their receipts and bills all the time, so that when tax season rolls around, people are ready to file and file early?
It is beneficial to designate a place in your home to save relevant tax receipts and materials throughout the year, such as a drawer or a shoe box. Many online options also exist for storing records, such as Jackson Hewitt’s MyTaxManager. In general, knowing where you can easily access your records will mean less time spent gathering items needed for preparing a tax return each year.
And with approximately 75 percent of taxpayers receiving a refund each year, there is no reason to wait. It can be advantageous to file early.
5) How is identity theft impacting tax returns, why is it on the rise in terms of taxes? What can people do to safeguard their tax returns from being tampered with or mishandled? How does filing tax forms early safeguard against identity theft?
A thief can steal someone’s identity, noted Pau, by taking an unsuspecting person’s social security number and personal information, and then using it to file a tax return under the person’s name and identity -- typically with fabricated information and deductions, and a resulting fraudulent refund. Unfortunately, in many cases, the victim is unaware that this has happened until a tax return is filed, only to find that a return has already been submitted in their name with fake information.
Here is what consumers should do to keep personal information out of the wrong hands as they prepare and file a return:
• Plan to file early – the sooner that your information is properly received by the IRS, the less likely it is that a thief will be able to access it.
• Make sure you e-file, or electronically file, your tax return. By e-filing, only you and your tax preparer will be handling your documents. The less people handling your information, the lower your chances are of having your personal information compromised.
• Keep important documents, such as copies of tax returns, credit card statements, cancelled checks, pay-stubs and similar data in a secure location like a locked file cabinet, or scan the information into a secure computer or web-based document storage program and destroy the original copies.
IRS web site
Tax experts advise people to file early and to file on line as a way to help avoid identity theft, as well as miscalculations and other clerical mistakes.
• Be sure to destroy documents older than four years. DO NOT simply throw them away -- destroy them or at least shred them.
• Be cautious and vigilant when it comes to providing any personal information, such as your social security number, bank or credit account numbers over the phone or via e-mail, and avoid carrying your social security card in your wallet.
• Be aware that the IRS never communicates via e-mail. If you get an e-mail inquiry from someone claiming to be from the IRS, or if you get a phone call asking for you to e-mail personal information, do not provide these details without verifying the legitimacy of the request first.
• If you suspect your identity has been stolen, contact the IRS right away.
6) You mention life changes that impact tax returns. In the past year or so what has been the most common life change that has impacted people's tax returns? Has it been, buying home? (What about refinancing? Has the most common been going back to school? Having a baby or caring for an elderly parent?
Even with everything we’ve just been through with the fiscal cliff and the American Taxpayer Relief Act of 2012, said Pau, nothing drives more changes to taxes than life changes.
While each person’s tax situation is different and we cannot speak to which life changes are most prominent, three of the most popular ones are having a baby, getting married (or divorced) and buying a home. There are significant tax considerations involved in each of these; be sure to speak with a tax preparer about them to ensure that you are claiming all of the benefits available to you.
In addition, apart from these, there are other life changes that can lead to a larger refund, such as a child returning to live at home after completing college, caring for an aging parent (and the parent does not necessarily have to live with you to trigger the tax benefit) or even you or your spouse deciding to go back to school. And, to conclude, I asked my seventh question.
7) How has the recession economy impacted tax returns over the past few years? Or does that matter?
Many people are still out of work, but it is important to know that there are many tax implications related to unemployment, she said.
First, unemployment compensation is fully taxable, said Pau. So if you were unemployed during the year, you will probably need to file a tax return. You may even be surprised to discover that you owe a considerable amount in taxes. If you did not have enough withheld during the year or if you did not make quarterly estimated tax payments, you may also owe an underpayment penalty.
If you collected unemployment benefits during the year, you should receive Form 1099-G, Certain Government Payments. All state unemployment benefits are taxable income for federal tax purposes and are reported on Form 1099-G, Box 1. The federal withholding amount, if any, is reported in Box 4.
Finally, know that if you started your own business during the year, or offered your services as a consultant while looking for a new job, your income is considered self-employment income. This income is reported on Form 1099-MISC, Miscellaneous Income. If you are considered self-employed and your net earnings are $400 or more, you must pay self-employment tax on the income you received. In addition, you may need to make estimated payments to cover the amount of self-employment tax and income tax associated with the income you earned.
As always seek the help of a trusted, experienced and certified, licensed professional to help with filing tax forms. For more information visit the IRS web site.