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Wednesday
Nov302011

Year-End Tax Letter

I hope that 2011 has, thus far, been a happy and prosperous one for you and your family.

 

In terms of legislation, 2011 was a quiet year on the tax front. Barring any last-minute retroactive congressional mischief, rates, deductions and credits are virtually unchanged from 2010.

 

This means that the usual year-end strategy of deferring gains and income, taking losses, and accelerating deductions holds true.

 

This doesn’t mean that the taxing agencies at the federal and state level have been idle, however. Both the IRS and the California Franchise Tax Board have new requirements and compliance programs, so here’s a “heads-up” for what to look out for this year.

 

Sales of stock and securities: If you sold stock or securities through a broker, the broker will issue you a revised form 1099-B. This form is intended to report all the details of each sale including the sales price and cost basis (usually what you paid for the stock) for determining capital gains and losses. This requirement is new, however, and the form provided by the broker will not yet capture all sales.

 

Most of you have provided excellent detail of your trading activities in the past, and in many cases you’ve been maintaining your own spreadsheets. Please continue to do so, but also please provide copies of any 1099-Bs and all other information provided by your broker that can help establish cost-basis.

 

Merchant charges, 1099-Ks: Those of you who are in business, rent property, or sell merchandise online will likely receive a new form – Form 1099-K. This form will report credit card or other merchant payments (PayPal for example) over specified amounts. Be on the lookout for this new form and please provide me with any 1099-Ks you receive.

 

This is no doubt part of a concerted effort by the taxing authorities to focus on the growing problem of unreported income. As this is the first year for this requirement, in all likelihood only PayPal vendors and Amazon affiliates will be affected, but if you maintain a website that serves as a portal for various forms of e-commerce, you will face this reporting requirement in 2012.

 

Beginning with your 2012 returns, you will have to report sales figures separately, on two separate lines: one for merchant cards and third party payments (generally, credit cards and remittances reported on Form 1099-K); and the other for cash and check payments. This requirement will apply to sole proprietorships (Schedule C) or rental properties (Schedule E), or other business returns (corporation, partnership, etc.).

 

You will therefore need to start tracking payments by type beginning in January, 2012. If you need any help setting up your accounting systems and procedures to separately track these amounts, please let me know.

 

Foreign accounts: The reporting requirements for assets held overseas are increasing convoluted, and the penalties for failure to report them are becoming increasingly draconian. Not all foreign holdings must be reported. If, for example you hold stock in a foreign company through a U.S. broker, foreign holdings are already reported. If you directly hold any other types of foreign assets, including bank accounts and securities accounts, please let me know, and if you have any doubt as to whether any of your assets are “foreign” for the purposes of compliance with current requirements, please contact me.

 

Property tax statements: California’s Franchise Tax Board has stated that they will require parcel numbers and other information pertaining to property taxes for any taxpayer who deducts property tax. Although this requirement isn’t slated to take effect in 2012, I would like you to provide me with copies of your property tax statements this year so I can do a preliminary review of them in preparation for the new requirement.

 

Use tax: California has long required payment of use tax if you purchase goods out-of-state that are used, consumed or stored in California, when no sales tax is collected on the purchase. Most such purchases are currently made over the internet or by mail order from out-of-state sellers. Taxpayers who don’t hold a California seller’s permit have the option of reporting the use tax on their California income tax returns , and in the past, reporting had been “voluntary,” and therefore ineffective. 

 

This is no longer the case. You now will have two options. You can total all untaxed out-of-state purchases and I will compute the use tax, or I can use  an official “lookup table” and report an amount due based on your California adjusted gross income. For example, if your adjusted gross income is $75,000, your use tax “due” will be $49. If your purchases are both over and under $1,000, you may elect to total just the purchases that are over $1,000 and I can compute the use tax on those and use the lookup tables for the small purchases.

 

New tax benefits

 

Not all the news is bad. There are a number of tax benefits that I can use to reduce your tax liability for this year and the future. There are new tax credits for employers providing health insurance, for small businesses increasing the number of employees, and an amnesty for payroll taxes, which has some major flaws, but could benefit your company.

 

Roth IRA conversions are still available and can be a useful way to reduce the tax you’ll pay later when you need the money.

 

Other changes

 

There are a number of other changes that might affect your tax return this year, including new rules for those who do not wish to file electronically, and a mandatory electronic payment requirement for higher income California individuals.

 

I anticipate sending out organizers to my returning clients before the end of January. When you receive yours, please take extra care in preparing it and providing all supporting documentation.  

 

Finally, if you want to file early because you’re expecting a sizable refund or for any other reason, please let me know before mid-January so I can schedule your return for filing before the March-April tsunami.

 

Thanks once again for letting me be your “tax guy,” and best wishes for the holidays.

 

Yours very truly,

 

Rick Zalon, CPA

 

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